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Low Oil Prices Continue To Take Their Toll On Canada’s Economy

Low oil prices and a resulting drop in business investment have led the Organization for Economic Cooperation and Development (OECD) to lower its expectations for economic growth in Canada for the second time this year.

In November, the Paris-based economic advisory council forecast 2.6 percent growth in Canada’s economy for 2015, but three months ago it downgraded that projection to 2.1 percent growth. On June 3, the estimate for this year fell even further, to 1.5 percent. Growth is expected to improve in 2016, though, to 2.3 percent, the OECD said.

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The primary reason can be summed up in one short, three-letter word: oil. Canada exports more oil than any other product, and the yearlong drop has had its toll on trade revenues. This is reflected in a 0.6 percent decline in the country’s gross domestic product, according to a report issued May 29 by Statistics Canada.

Yet the government in Ottawa and the Bank of Canada remain somewhat optimistic. Both say they expect the economy will improve during the latter half of 2015, in part because of what they forecast as growing U.S. demand for Canadian exports. They also envision increased consumer spending in Canada because of lower prices for gasoline and the end of a bitter winter that stifled commerce.

In fact, the OECD shares some of that optimism. “Following recent weather-related weakness, consumption growth should pick up,” it concluded. And it said Canada’s plans to shift exports away from oil will help strengthen investment in the country’s other industries.

The OECD also expressed concern about individual Canadians’ increasing debt burden, which could limit consumer spending, as well as a 0.7 percent contraction of the U.S. economy in the first quarter of 2015 and a sharp decline in China’s economy, both of which are important to Canada’s trade revenues.

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Yet the report also finds some positive news: an increased demand for oil, and gradually higher prices for the fuel, as well as expected growth in demand among some of Canada’s trading partners.

The OECD isn’t the only economic observer of Canada’s fortunes. In a separate report released simultaneously, the Royal Bank of Canada (RBC), the country’s largest financial institution, has a much more optimistic view than the OECD of Canada’s economy during the second half of 2015. During that period, it said, economic growth will reach 1.8 percent, followed by 2.6 percent growth in 2016.

But RBC’s report is tempered by its acknowledgment that that growth won’t include business investment through the rest of this year, primarily because the country’s energy companies are expected to reduce capital spending by about 30 percent. Yet this will be offset somewhat by stronger demand for other commodities, spurred at least in part by reduced costs for financing.

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“Our outlook for Canada’s economy reflects a positive read on expectations for consumption and housing, and the notion that a strengthening U.S. economy and a more competitive domestic currency will fuel increased demand for Canadian exports,” Craig Wright, RBC’s senior vice president and chief economist, told the Financial Post.

By Andy Tully Of Oilprice.com

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