Canada in 'much better' situation than U.S. from oil perspective: Canoe's Tahmazian
Economists in Canada are scrambling to revise down their growth forecasts on tumbling oil prices that are stoking fears of a recession.
Rising coronavirus concerns prompted economists to start reducing gross domestic product estimates last week. Monday’s plunge in oil prices is sending them back to the drawing board to consider a much more dire situation. The country’s five largest banks will release updated forecasts in the next few days that will show a significantly weaker growth picture.
“It’s very possible that Canada in the first half of the year has no growth,” Beata Caranci, chief economist at Toronto-Dominion Bank, said in a phone interview. Besides the shock from lower oil prices, the financial market pressures and confidence impacts from coronavirus are “quite a lot to bear” if sustained, Caranci added.
The oil crisis could be the last straw for the Canadian economy which was already on soft footing at the end of 2019, after a drop in exports and business investment resulted in the slowest quarterly pace of growth in three years. Now the oil shock has created more downside risk.
Some economists are even flirting with the idea of a recession.
“Given market developments in the last couple of days, the likelihood of a recession has increased dramatically,” Jean-Francois Perrault, chief economist at Bank of Nova Scotia in Toronto, said by phone.
As recently as last month, the median forecast in a Bloomberg survey was for growth of 1.6 per cent in 2020 -- in line with what the federal government has been projecting in its fiscal outlook. That forecast was slashed last week to about 1 per cent on the back of the fallout from the coronavirus. The impact of this week’s oil shock is set to drive it even lower.
Stocks dropped as much as 10 per cent early Monday in Toronto, the loonie weakened and government bond yields plunged as investor pessimism deepened. Canada exported just over CUS$80 billion (US$59 billion) in crude oil and bitumen in 2018, when benchmark oil prices averaged US$57 a barrel. West Texas Intermediate crude for April slumped as much as 34 per cent to US$27.34 a barrel on the New York Mercantile Exchange, before paring losses to 19 per cent.
The Bank of Canada lowered interest rates last week in an attempt to stimulate growth. The outcome for the economy in 2020 may hinge on what the federal government does to bolster consumer and business confidence.
Finance Minister Bill Morneau said last week the government has the tools to shield the economy from the coronavirus crisis, though he stopped short of spelling out specific steps. With the federal budget expected within weeks, Morneau said the government plans to increase the amount it sets aside for emergencies.
To be sure, Canada’s oil sector isn’t as large as it used to be, so the impact of lower prices may not be as dramatic. And the industry already underwent a significant adjustment after the rout in crude markets in 2014-15.
“Yes, it’s a negative, that’s undeniable, but the footprint of the oil and gas sector is not what it was back then,” Benjamin Reitzes, a macro-strategist at Bank of Montreal, said by phone from Toronto.
Still, the combination of headwinds could weaken growth to the point where the pain shows up in the labor market. Given Canada’s elevated levels of household debt, that poses broader risks for the country’s financial system.
According to the finance department’s own sensitivity analysis, a one-year, 1 percentage point decline in real GDP would have an annual CUS$5 billion (US$3.69 billion) hit on the government’s bottom line. That would be on top of the near CUS$30 billion deficit already forecast this year from the federal government, even before any new spending measures Prime Minister Justin Trudeau promised during last fall’s election campaign.
Markets are already anticipating the Bank of Canada will lower interest rates to levels not seen since the 2008-09 recession. Swaps trading suggests the central bank will lower its policy rate to 0.5 per cent over the next six months, from 1.25 per cent currently.