The Bank of Canada’s governor Stephen Poloz said that he expects Canada’s economy to overcome the setback caused by the plunge in oil prices and return to full capacity by the end of 2016.
According to Poloz, last year saw a large number of job losses in the Canadian oil sector due to the drop in the price of Brent crude oil from $100 to below $50. As a result, manufacturers of equipment for the oil industry were adversely affected, and housing and consumer expenditure experienced slower growth.
Poloz says that based on the recent figures that were released on May 29, Canada’s output in the first quarter has been “basically flat”. However, he predicts that following the January interest rate cut and the low value of Canadian dollar, the second quarter of this year would see the economy “rebound partially.”
Poloz also expressed optimism that the economy would be “back on track to reach full capacity around the end of 2016”.
However, Poloz has warned that the effects of oil price shock may take years to fade away. “The implications for income and investment (of low oil prices), and the adjustments they’re causing across sectors and regions, may take years to work themselves out.”
A manufacturing report in Canada and strong employment trends in the United States indicate better economic prospects for Canada in the second half of 2014.
Growth rates of 1.2% in the first quarter and anticipated 2% in the second quarter are well below the predictions made by the Bank of Canada at the beginning of the year. However analysts are suggesting that the second half of 2014 will put the Canadian economy back on track, mainly because the US economy is now leaping into the best stretch of expansion since the 2008-09 recession.
“There are some signs of improvement in the external background, especially the US. About 50% of Canadian manufacturing sales are exported and the bulk of that is going to the United States,” says Nathan Janzen, an economist with the Royal Bank. His bank’s manufacturing purchasing manager’s index for June shot up to 53.5 following consecutive contractions in April and May.
The manufacturing report was uniformly solid with stronger output and new orders providing the biggest boost. New export orders also rose, along with an increase in the backlogs of work and the quantity of purchase indexes.
Evidence of the strong turnaround appeared when private employers in the US added 281,000 jobs last month. According to CIBC economist Andrew Grantham, these strong numbers support the view that the American economy is picking up steam and that growth will likely stay strong in the third and fourth quarters as well.
This is good news for the Canadian economy too. The Bank of Canada has long waited for a “rotation” in the economy, from one which is driven by housing and consumer spending to one that is led by increased foreign demand for Canadian exports and business investment.
The latest forecast from National Bank supports the theme, predicting that better export prospects will “rekindle” employment and business investment in Canada’s two most populous provinces. The bank predicts Ontario’s economy growing by 2.1% this year and 2.4% in 2015, with Quebec’s advancing by 1.9 and 1.7% in the same years.
Sources: CTV News