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Portfolio > Economy & Markets

Canada and Oil

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The falling price of oil has hit Canada hard, with Bank of Canada Governor Stephen Poloz warning that its effect would be “atrocious.” Considering that Canada has the third-largest proven oil reserves in the world (coming in only after Saudi Arabia and Venezuela), that’s not surprising.

Statistics Canada said that the country’s GDP shrank in January, unsurprisingly, with wholesale, retail, manufacturing and construction all contributing. But January’s shrinkage level wasn’t as bad as economists expected. Continuing low oil prices, however, are likely to take a heavier toll on the economy for the quarter as a whole and in months to come.

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Interestingly, Canadians themselves in general don’t seem to be all that concerned, although businesses’ anxiety level about whether the falling economy could be a longer-term problem rose after the Bank of Canada cut interest rates in January, in what was supposed to be an effort to head off problems.

The move, which came as a surprise, apparently did more to boost worries than offer any support to the economy. In February the Canadian Federation of Independent Business Barometer fell to 59.1, from January’s 63.5—although in March it rebounded slightly, gaining a level of 61.5. According to the CFIB, the gains were more in service-oriented businesses and in construction, while the resources sector continued to decline.

Smaller businesses may be feeling somewhat better, but larger ones are still not happy—which means their investors need to beware. In January Target announced that it would be closing all its Canadian stores, cutting loose as many as 17,600 workers. Suncor Energy announced capital spending cuts that included the loss of 1,000 jobs. And in March Best Buy Canada announced a round of belt-tightening that includes closing 66 of its Future Shop electronics stores and rebranding others. Both full- and part-time workers will be hit, with 1,500 losing jobs, and the company will take a restructuring charge that could go as high as $280 million.

All those jobs going away, and other cuts as the ripple effects from the energy sector’s troubles spread, means that Canada is not quite such a happy place these days, even if its people don’t seem too worried. In fact, it would seem that worries are more for investors, businesses and the executives who run them, since Canadians outside Alberta are responding positively to Chartered Professional Accountants of Canada surveys about their own financial circumstances. They view lower interest rates and gas prices as positive news, seeing the glass as half full.

Of course, if oil prices continue at their current low levels, all that could change, since the misery from the energy sector would then spread farther afield, causing more job losses and having a greater effect on all the other sectors that depend on people with jobs spending their paychecks. Foreign Affairs, Trade and Development Canada’s monthly merchandise trade report for January, released in March, showed how much the country is affected by the oil market, since “[t]he total decline in exports was roughly equal to the decline in energy products exports. The loss of $1.2 billion in this export category was entirely due to prices, as volumes actually increased.” Energy product exports fell 14.7% from December and 35.7% from a year ago January, indicating that the sector is truly suffering.

Still, exports are viewed as a way to get the Canadian economy back on track, especially since Canada has free trade agreements with enough countries to span more than half the global economy. In 2014 it added the European Union and South Korea to the list. Now Prime Minister Stephen Harper is looking toward the Trans-Pacific Partnership and talks with India and Japan in hopes of broadening the country’s reach still further.

That increase in optimism in the construction sector? There’s another side to that, with some fearing a bubble might be about to burst. As of February, according to the Canadian Real Estate Association, home prices increased 6.3% nationally over the year before, although Fitch Ratings said it expects the increases to slow during the year. Fitch also said it “believe[s Canadian house prices] are overvalued when compared with long-term fundamentals.”

Even the Canadian dollar is coming in for some of the pain—although that can be a two-edged sword. Some are optimistic about the effect that could have on exports. Tourism should also see a boost with a cheaper loonie, but how much of a difference it would make to the country’s economy as a whole remains to be seen.

And some are taking a lower Canadian dollar as an opportunity to invest in Canadian real estate. They might want to wait a while, however; the Bank of Montreal said back in February that the Canadian currency “will remain in crash position” if the Canadian and U.S. economies diverge further.

That could happen, according to BMO economist Sal Guatieri, if the U.S. raises interest rates this coming summer and the Bank of Canada finds itself lowering its own once more. While BMO isn’t taking an official position that the Bank of Canada will do so, the surprise rate cut earlier this year has raised the possibility—and Guatieri didn’t dismiss it.


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