The sharp drop in oil prices will continue to weigh on the Canadian economy over the next few quarters, but we should still see growth of around 2% this year, according to TD’s quarterly economic forecast.
“No matter how you parse it, the overall impact on the Canadian economy of lower oil prices is negative," notes TD Chief Economist Craig Alexander.
“That said, there are offsets to lower oil prices on the economy, and some regions are going to benefit from these economic tailwinds more than others.”
Low interest rates, economic growth in the United States, a weaker Canadian dollar and energy savings to consumers will help buoy the economic climate in Canada.
TD expects the Bank of Canada to keep interest rates low until at least the end of 2016. In January 2015, the country’s central bank surprised analysts by lowering the overnight rate target to 0.75%. This was a decrease of 25 basis points from where the rate had sat for more than four years. Earlier this month, the bank announced it would continue to keep the rate at 0.75% for the time being.
http://www.biv.com/article/2015/3/central-bank-holds-overnight-rate-075/
Low interest rates are favourable to households, TD said, and will help prop up the country’s housing market.
The U.S. is one of Canada’s key export market, and the American economy is strengthening. This, combined with a lower Canadian dollar, will provide momentum for Canadian exports.
The average household, TD said, will save around $800 per year due to lower energy costs. However, around three-quarters of these savings will be eaten up by increases in the price of consumer goods, which will result from the lower dollar.
“In our view, downside risks to [low oil price] levels remain, especially as global supply continues to outpace demand by about 1.5 million barrels per day, leading to rapidly-depleting storage capacity,” TD said in the report.
“As a result, we believe prices could follow another leg downward towards the US$40 mark over the coming months, before recovering to around US$65 per barrel on average in 2016.”
As could be expected, oil-producing provinces will be particularly vulnerable to the effects of the oil price slump over the next while. Government coffers in these provinces will be depleted, and TD notes that these governments have already started looking at ways to slash spending.
As for the unemployment rate, TD forecasts that this will jump to about 7% from the 6.8% recorded in February. By the end of 2016, however, the rate is expected to settle around 6.7%
