Cold Weather And Low Oil Prices Conspire Against Canadian Economy

To no one’s surprise, Canada’s economy shrank in January due to declines in both wholesale and retail sales, both affected by sluggish construction and manufacturing attributable in part to the collapse of oil prices.

However, the negative impact of low oil prices was felt less in January than in previous months, evidently because Canada was able to produce enough merchandise to satisfy the increasing demand for its exports.

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During January, gross domestic product (GDP) dropped by 0.1 percent, Statistics Canada (Statscan) reported March 31. GDP had also declined by 0.2 percent in November, but inched up by 0.3 percent in December. Generally, economists had expected a 0.2 percent in GDP in January.

As a result, “January was weak, but not ‘atrocious,’ as the Canadian economy started the year with a modest decline,” Avery Shenfeld, chief economist at the investment bank CIBC World Markets, told Canada’s Financial Post. His use of the word “atrocious” was a reference to grimmer expectations previously voiced by Stephen Poloz, the governor of the Bank of Canada.

In January, the price of oil hit its lowest so far in the current, 9-month-old plunge to an average of just US $47 per barrel. That coincided with exceptionally bitter cold accompanied by abnormally heavy snow in many parts of a country already used to harsh winter weather.

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Together, the weather and oil’s woes combined to bring down wholesale activity by 2.6 percent and retail by 1 percent. Nevertheless, production of merchandise was up by 0.3 percent after a similar rise of 0.4 percent in December.

And energy prices notwithstanding, production of Canadian oil and gas was up by a fairly generous 2.6 percent. However, Statscan said that may have been due to a resumption of activity at some oil sands fields in western Canada after extended maintenance shutdowns. In fact, Statscan noted, conventional oil and gas production declined in January.

The drop in Canada’s manufacturing sector was something of a surprise. It is expected to be the most important part of the country’s economic recovery in 2015 because of growing demand in the United States, but in January it dipped by 0.7 percent. That followed a more promising 2.1 percent rise in December.

Although the decline in Canada’s GDP wasn’t as steep as most economists had anticipated, there’s still concern about what the numbers for February will be, given that that month, too, experienced unusually harsh weather and economic woes arising from depressed oil prices.

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On the optimistic side, the Bank of Canada says that because the low price of oil had an early impact on the country’s economy, its effects could vanish earlier as well. Yet it doesn’t mean that Canada can expect healthy growth during the first quarter of 2015 given how much the bitter weather in both Canada and the United States have made business sluggish.

“With February activity likely to be weak as well, there’s a decent chance that first-quarter GDP could be negative,” Benjamin Reitzes, a senior economist at Bank of Montreal, wrote in a research note. “The big question is whether the second quarter rebounds as the [Bank of Canada] anticipates.”

By Andy Tully of Oilprice.com

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