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Oil Bust Continues To Take Its Toll On Canadian Economy

Canada Oil Rig

The fallout from the commodities price rout may prove to be more lasting than that of the 2008 global financial crisis. Economies dependent on oil and minerals have borne the full brunt of the price drop, but even mature, diversified economies such as Canada’s have trouble dealing with the consequences of an 80 percent slide in the price of crude over 16 months and similarly major declines in other key commodities.

A business sentiment survey conducted by the Bank of Canada among 100 companies between May and June has revealed that local businesses are wary of new investments, with the majority of respondents not planning any over the next 12 months.

The situation is understandably the worst in energy and related industries, where many businesses are preparing a new round of cost cuts, while service providers are guardedly optimistic, planning to add new jobs. The goods sector is also mostly pessimistic, planning further job cuts.

In terms of sales projections, the situation is not so gloomy: 43 percent of respondents in the survey said they anticipated an acceleration in sales growth over the near term, which is lower than the 48 percent in the previous survey, but still a reasonably healthy portion. It’s worth noting, however, that expectations may have changed significantly in the wake of the Brexit vote. An analyst poll conducted by Reuters has suggested the British vote would have negative consequences for the Canadian economy. Related: Texan Oil Production May Not Be Falling As Fast As Analysts Believe

Although the situation is not exactly rosy, the central bank is not, for the time being, considering any further interest rates cuts, after the two it made last year when the commodity price rout raged at full force. At the moment, they key rate is 0.5%, and the next announcement on rate policy will be made on July 13. According to the analysts polled by Reuters, the next rate hike will most likely take place in the first quarter of 2018.

A cheaper Canadian dollar is seen as one driver of improved growth in sales, along with greater demand for Canadian produce from its southern neighbor. Yet, cautions the central bank, “For many firms, however, foreign demand is insufficient to offset weakness coming from their domestic customers and, in some cases, refocusing sales efforts towards export markets is proving difficult.”

The looney, which slid significantly as oil prices began their journey to rock bottom, has regained some of its value against the greenback over the last few months as prices started recovering – not least because of supply outages in Alberta – but CIBC analysts expect the trend to reverse later on, especially towards the end of the year, if the U.S. Federal Reserve decides to raise interest rates.

The Canadian currency could also drop earlier, in the summer, after the release of second-quarter economic data from StatsCan, the Financial Post notes, quoting CIBC analysts as projecting these to be worse than expected. This would imply that expectations are overly optimistic, yet surprises are always possible.

As a whole, modest growth is always better than no growth at all, so even if Canada is still not out of the woods, as CIBC’s chief economist Avery Shenfeld told media, it is seeing the light of day through the thick branches.

By Irina Slav for Oilprice.com

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