Bright skies on Canada’s horizon despite oil’s many dark days

Share

Looking at the headlines, any Canadian could be forgiven for concluding the economy has gotten absolutely nowhere from Christmas, 2014, to Christmas, 2015. But a lot has changed, despite gloomy appearances. Indeed, there's something to that old "darkest before the dawn" saying; a year further down the road with our problems has almost certainly put us a year closer to emerging from them.

That's far from obvious, when so much of the news looks like a carbon copy of a year ago. Monday's news alone gave us oil prices sinking to new lows (again/still) and Canadian household debt hitting record highs (still/again). Some of the country's biggest housing markets continue to run far too hot for comfort, driving the Teranet-National Bank national house price index to its biggest year-over-year rise in four years. Giants of the Canadian energy sector (in the past few days, Encana Corp. and Cenovus Energy Inc.) are slashing their capital spending budgets. The Canadian dollar and Canadian stocks are sinking.

There are understandable fears that the economy might be heading into another bleak winter – for the third year in a row.

Bank of Canada Governor Stephen Poloz has used the term "serial disappointment" to describe these sorts of economic setbacks that have dogged the Canadian and world economies in the post-recession era. But this isn't a serial, it's a rerun. Déjà vu disappointment.

Yet Mr. Poloz sounded surprisingly upbeat in a speech and news conference last week. Maybe that's because as bad as things look at the moment, we're certainly closer to the end than the beginning.

Consider oil prices. As dispiriting as it might be to see crude dip below $35 (U.S.) a barrel early Monday, there's little doubt that most of the damage to oil prices has already been done. Not only is it mathematically impossible to duplicate the $50-plus slide from the middle of 2014 to the end of last year, but we're also at levels where substantial amounts of global production are unprofitable. There isn't much more downside.

Energy sector business investment tumbled about 40 per cent last year, and the Bank of Canada had already anticipated another 20-per-cent reduction for next year, before things stabilize. The cuts announced by Cenovus and Encana are pretty close to that mark; we're not suddenly seeing sharper reductions as a result of the past few weeks of falling oil prices. (Indeed, the timing of these announcements is consistent with the traditional budgeting season for oil and gas companies; it has nothing to do with oil's latest swoon.)

We should remember, too, that while the further erosion of oil prices is bad news for Canada, it's decidedly good news for the global economy as a whole. Last July, after oil prices had already suffered most of their declines, the International Monetary Fund published a report estimating that the drop would boost global economic growth this year by about 0.5 percentage points. Economists have estimated that every 10-per-cent drop in the price of oil translates to a 0.1- to 0.2-percentage-point boost to U.S. gross domestic product.

This is because of the substantial boost in disposable incomes that consumers get from their shrinking energy bills, not to mention the break energy-intensive businesses get on their input costs. The effective transfer of income from energy producers to consumers doesn't instantly translate into spending, but the money is in consumers' pockets nevertheless. The consumer side of the world economy now has considerable capacity in the next year to generate growth.

For an export-intensive country such as Canada, the latest down leg in oil could prove a blessing in disguise, providing an additional spark for non-resource exports that have already made strong gains in the past six months or so. Indeed, the fall of the Canadian dollar over the past year, combined with the improvements in the U.S. economy, have put Canada in a much stronger position than it was a year ago to weather an extension of the weakness in energy and mining commodities.

This ties in to the housing market, too. Yes, Canada now has a new federal Finance Minister (Bill Morneau) who, unlike his predecessor (Joe Oliver), recognizes a need to tighten mortgage regulation to cool the housing sector, as his announcement last week on new lending restrictions attests. But even if Mr. Oliver had been so inclined a year ago, the timing would have been somewhere between wrong-headed and disastrous, tossing an anvil to markets that had just been tossed overboard by the oil shock. Now, with other elements of the economy having gained strength to offset the resource sector's weakness, we're in a much more stable time to apply some brakes to housing.

Are we out of the woods? No. The tumult of the past couple of weeks is a reminder that there are a lot of hard-to-predict moving parts in the Canadian and global economies, not the least of which is a likely interest-rate increase this week from the powerful U.S. Federal Reserve, a potential volatility-inducing event if ever there was one.

But from Canada's perspective, a year removed from the oil shock is a much better place to sit than at ground zero of the shock, where we were this time last year. Even if it doesn't always look that way.