The Bank of Canada acknowledged Wednesday the struggles of the oilpatch are weighing on the broader economy, adding that investment in the sector is “projected to weaken further.”
The central bank, which announced it will keep its key interest rate unchanged at 1.75 per cent, said global benchmark oil prices have been about 25 per cent lower than expected since October.
“Here in Canada, lower oil prices have reached the point where they will have material consequences for our macroeconomic outlook,” Bank of Canada governor Stephen Poloz said.
Worries about oversupply and slowing global demand for oil are also reflected in the bond and equity markets, the bank said. It also directed attention to a costly gap between Canadian and U.S. benchmark oil prices.
“While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further,” the bank said in a statement.
However, overall, the bank expects the impact of the oil price decline to be about one-quarter the size of that during the oil price plunge that hit in 2014 and continued through 2016.
The Bank of Canada expects the slide in oil prices since last summer will reduce the level of Canadian gross domestic product by about 0.5 per cent by the end of 2020.(Chris Wattie/Reuters)
Concern over oil prices came to a head last fall in Alberta as the price gap between Canadian crude and U.S. benchmarks hit new records, topping $50 US a barrel in October, due to rising oil production, export bottlenecks and American refinery maintenance.
A number of oil executives and politicians warned of a broader impact on the economy.
This month, Alberta began enforcing mandatory production cuts on its largest oil producers in a bid to clear the oil glut.
Todd Hirsch, chief economist at ATB Financial, called it “encouraging” that the Bank of Canada is taking note of the issues in the oilpatch and their broader impact.
“I know it’s really fashionable right now in Alberta to feel that nobody outside the province cares about us,” Hirsch said.
“Well, the Bank of Canada certainly does understand the energy economy and they understand that this is a national problem, not just an Alberta problem.”
Hirsch said Poloz’s remarks sounded “more dovish,” leading to speculation “they may not raise rates at all in 2019.”
And that should help Albertans as many expected rates to go up, he said.
“It makes it more comfortable for all those people who are either carrying debt or wanting to take on some mortgage debt,” Hirsch said.
“There’s not a lot of welcomed news these days … but, in Alberta, we’ll take whatever breaks we can get. And holding steady on interest rates is one break I think we need right now.”
Robert Mark, portfolio manager at Raymond James in Toronto, said Poloz’s remarks on the struggles of the oilpatch were appropriate. He thinks the issue, which he called a “crisis” for the economy, has deserved to get more attention than it has.
Alberta Premier Rachel Notley speaks last month during an announcement of a mandatory cut in oil production to deal with a price crisis.(Jason Franson/The Canadian Press)
Mark said the energy industry is a big part of the Canadian economy and so, in light of the current challenges, there’s some reason to be less aggressive in monetary policy.
“You can’t have that kind of bloodshed — in terms of prices and differentials and job losses and all the things that come with it — without having negative ramifications,” Mark said.
The Canadian economy has been performing well overall, the bank said Wednesday.
“Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low,” said the Bank of Canada release.
It said exports and non-energy investment are projected to grow solidly.
However, the bank said, household spending will be dampened further by slow growth in oil-producing provinces.
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