Bank of Canada warns economy could be in for a r

Bank of Canada warns economy could be in for a rough ride

BARRIE McKENNA and BILL CURRY

OTTAWA — The Globe and Mail

Published Tuesday, Jan. 13 2015, 9:23 PM EST

Last updated Wednesday, Jan. 14 2015, 6:21 AM EST

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The Bank of Canada is acknowledging for the first time that the world may be facing a prolonged oil-price slump, casting a dark shadow over the country’s economic prospects.

The price of crude, already sliced in half since the summer, could fall further and stay low for a “significant period,” deputy governor Timothy Lane warned in a speech Tuesday.
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The country’s top economists gathered for an economic pow-wow today, where most agreed that Canada is going to have an ‘OK’ year, with a muted annual growth of 2% or a little higher. The economists from the big banks also expect the U.S. to move towards tighter interest rates sooner than Canada. Andrew Bell reports.
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That could have profound and far-reaching implications for the Canadian economy, including putting more cash in the hands of consumers and exporters. But cheap crude is also likely to sap overall growth, send the dollar lower, dent federal and provincial government revenues, and perhaps delay eventual interest-rate hikes.

The bank’s comments come as private-sector economists are making increasingly bold claims that the federal government is at risk of missing its target for a return to fiscal balance this year.

The latest challenge to the key Conservative promise came in a Toronto-Dominion Bank report that said Ottawa will be in deficit two years longer than planned even if oil prices rebound significantly from current lows. The price of U.S. crude slumped to a six-year low of $45.89 (U.S.) Tuesday.

The report projected two additional years of budget deficits due to lower oil and the fact that the government announced tax cuts in the fall that will reduce federal revenues by nearly $27-billion over the next five years. The package of tax cuts includes allowing couples with children to split income for tax purposes, a controversial policy that Prime Minister Stephen Harper announced in October even though his party had previously said it would delay the cut until after it erased the deficit.

Speaking in Edmonton, Alberta Premier Jim Prentice rejected suggestions the oil-rich province is headed for recession, but said a provincial sales tax was up for discussion amid the worst budget squeeze in a generation.

Suncor Energy Inc., Canada’s largest oil-sands company, said Tuesday it is cutting $1-billion from its capital spending program as it defers work on some of its projects. Suncor is also shedding about 1,000 jobs.

The precipitous drop in the price of crude – to less than $50 per barrel from more than $100 – will likely be bad for Canada, on balance, but beneficial to the global economy, the Bank of Canada’s Mr. Lane told a business audience in Madison, Wis. “We see important risks to Canada’s economic outlook stemming from the recent decline in the price of oil and other commodities,” he said, without quantifying the exact cost to the economy.

In mid-December, when oil was at $60 per barrel, Bank of Canada Governor Stephen Poloz said lower prices would shave about 0.3 percentage-points off economic growth, which had been expected to reach 2.4 per cent this year.

Demand for oil-sands crude will eventually rebound, but in the meantime the Canadian economy could be in for a rough ride, Mr. Lane said. Consumers, exporters and energy-intensive manufacturers will benefit, but these gains will be “more than reversed” by lower incomes and slashed oil-sands investment, he said.

Tuesday’s Toronto-Dominion Bank report said that in the absence of new measures to raise revenue or cut spending, Ottawa will not accomplish its goal of returning to surplus in 2015-16.

“The conclusion is unambiguous,” states the report authored by TD senior economist Randall Bartlett.

Rather than a $1.9-billion surplus in 2015-16 as outlined in Finance Minister Joe Oliver’s fall fiscal update, TD is projecting a $2.3-billion deficit, followed by a $600-million deficit the following year. The return to surplus would be pushed back to the 2017-18 fiscal year.

The report cautions however that the government has put aside $3-billion a year for unforeseen events and that amount could still be enough to post slim surpluses in the coming years. TD’s forecasts may prove to be too optimistic as they assume an average oil price of $67.50 in 2015, an estimate that Mr. Bartlett said is likely to be revised downward by the bank in the coming weeks. Should oil fall to $40 and remain at that price, the federal deficit could be as large as $4.7-billion in 2015-16 and $2.4-billion in 2016-17, according to TD.

That presents a clear accounting challenge for Mr. Oliver as he prepares the 2015 budget. The minister’s November fiscal update adopted the practice of using the current price of oil at the time – then $81 a barrel – as the planning assumption for the next five years. If that practice is repeated in the budget when oil prices are low, it will be harder for the government to show a return to surplus in the coming year.

Mr. Oliver stood by his government’s surplus projections Tuesday, saying in a statement that “we will balance the budget in 2015.”

Conference Board of Canada chief economist Glen Hodgson – who said this week that lower oil prices will likely plunge the province of Alberta into recession – said balanced budgets are a good goal for governments because they are simple to understand. But Ottawa must be cautious not to cause harm in an effort to meet a set timeline, he said.