Nov 23, 2018
Canada's growth will be cut if ‘extreme’ oil price discounts hold: TD
Canadian economic growth will suffer if the record price discounts on the country’s oil stays at current levels, which could force the Bank of Canada to hold off on raising interest rates, according to Toronto-Dominion Bank economists.
Omar Abdelrahman and Brian DePratto said in a report Friday that Canadian gross domestic product could be cut by as much as 0.5 percentage points next year if oil prices remain at such low levels.
“If current [oil] pricing holds, impacts on real activity, incomes, and government revenues would quickly mount,” the report said. “In that instance, Alberta’s economy would be hard-hit and national Canadian growth could be cut by as much as 0.5 percentage points relative to our current baseline path.”
The economists said production cuts by Canadian energy producers so far this year will also shave up to 0.5 percentage points from real GDP growth in the fourth quarter.
They added that if the energy sector was hit by more refinery delays or shutdowns, and oil prices did not recover by the Bank of Canada’s decision on interest rates in January, the central bank could put the brakes on tightening monetary policy.
“This would suggest a more prolonged period of weakness, and a worsening of the economic impact,” the economists said. “Should this occur, we would expect the Bank of Canada to hold off on raising its policy interest rate until there is further stabilization in oil prices.”
The Canadian economy is expected to grow 2.5 per cent in the fourth quarter and 2.1 percent next year, according to a Bloomberg poll of economists.
TD economists, however, said they expect the “swelling” price differentials between Canadian and U.S. oil to “normalize” in the near term.
“Price discounts of this extreme magnitude have not historically been sustained for more than a few months,” the report said. “Indeed, we expect a steady narrowing in the heavy oil spread to US$20-25 over the next few quarters. Light and upgraded oil spreads are also expected to narrow in lockstep.”
“Provided that prices begin to normalize, growth impacts on Canada should be contained.”
The report comes as the North American crude benchmark, West Texas Intermediate, traded at about US$50 per barrel on Friday, while Western Canadian Select crude oil was trading in the US$15 a barrel range.
