While dropping oil prices have boosted the U.S. economy, how the price slump will affect the outlook north of the border remains a question mark from where Canada’s largest lender sits.
“In Canada, it’s a little bit less clear-cut. And the reason is our energy sector is much larger as a share of the overall Canadian economy. So there is more uncertainty,” said Paul Ferley, assistant chief economist with RBC.
The Bank of Canada has previously characterized falling oil prices as “unambiguously negative,” but now seems to be backing away from that view a bit, Ferley told the Canola Council of Canada’s convention in Banff last Wednesday.
“Recent comments have sort of acknowledged that there are positives that come out of these oil price shocks. And that could help temper the hit to the energy sector.”
Lower oil prices have been a net benefit to the U.S. economy, which in turn should benefit Canadian exporters, he explained.
The Canadian dollar’s dip should enhance that effect, he added; RBC expects to see exporters, including manufacturers, respond by increasing export growth.
“And so we’re less pessimistic in terms of the Canadian outlook,” he said.
Dropping oil prices also imply lower gas prices, Ferley added, comparing the savings to a “major tax cut for Canadian households.”
The question, he said, is whether consumers spend those fuel savings, boosting the economy.
RBC doesn’t expect to see government spending to stimulate the economy. The bank also expects housing investments to flatten.
The bank is counting on strengthening exports and more consumer spending to help offset weaknesses in investment, especially in energy, he said.
Others, he noted, are less optimistic about Canada’s economic outlook over the next couple of years.
“The Bank of Canada has made comments that suggest that they’re not sure that the manufacturing sector can take advantage of (the situation),” said Ferley. “They’ve been downsizing so aggressively in past years that they don’t really have the productive capacity to respond.”
Exporters, he said, have already started to respond to these incentives.
Since 2012, Canadian exports have underperformed relative to growth in the U.S. economy, Ferley told council delegates, and it’s suspected that the Canadian dollar’s move toward parity was part of the reason for that underperformance.
The gap started to close last year, as the Canadian dollar dropped, he added.
In the medium term, an aging workforce is an issue for the Canadian economy, Ferley said. “If you have fewer people working, and more people drawing on some of those (social) benefits, the math starts looking pretty ugly.”
Higher productivity, driven by technology, is one way to counteract the demographic slump. Productivity data can be volatile, he said, but there’s anecdotal evidence that Canada is making inroads.
As an example, Ferley cited the 2013 bin-buster — which was partly driven by innovation in the ag sector.
RBC’s relatively optimistic economic outlook also acknowledges certain risks — for example, that stronger exports and consumer spending in Canada may not emerge, or that the U.S. recovery may falter for some reason, which in turn “spells bad news for Canadian exporters,” he said.
A sharper correction in the Canadian housing market is the third risk, he said. Although the housing market is “still a little bit frothy,” in Ferley’s opinion that risk has “a fairly low probability.”
— Lisa Guenther is a field editor for Grainews based at Livelong, Sask. Follow her @LtoG on Twitter.