Clouds darken
Economists are becoming an awfully gloomy bunch, some warning that “the worst may not be over” for oil-shocked Canada.
In the space of less than a week, several groups have released reports that paint a bleaker picture, questioning the Bank of Canada’s forecasts and wondering how policy makers will react.
Of course, the Bank of Canada wasn’t all that upbeat in its latest projections, either.
“The persistence of low oil prices means the worst may not be over for Canada,” said Krishen Rangasamy of National Bank Financial.
“Lower projections for oil prices should lead to further cuts to investment spending and hurt growth,” he added.
“We have accordingly downgraded our 2016 growth forecast to just 0.9 per cent.”
At its most recent meeting, the Bank of Canada held its key rate steady, tossing the ball to the new federal government, which will unveil its stimulus plans in its coming budget.
But observers wonder how strong those measures will be, and question whether the Liberal government of Prime Minister Justin Trudeau will need to go further than planned.
“We’ll need to see a more forceful and timely fiscal policy response in the upcoming federal budget than what was promised during the election campaign to paper over oil-induced weakness and put off the broader stall in Canadian growth we now fear,” Mr. Rangasamy said.
And just today, CIBC World Markets cut its forecast for economic growth this year to 1.3 per cent.
“Even to achieve that pace, we’re allowing for an additional $10-billion in stimulus relative to the election platform and a $30-billion federal deficit, and a slightly weaker track for the Canadian dollar,” said chief economist Avery Shenfeld.
Oil prices climbed today, by the way.
Here are six charts that tell the ever-bleaker story.
While Mr. Rangasamy’s National Bank is on the gloomier side, economists as a group have been cutting their projections.
“While the impacts of the oil shock on the Canadian economy are complex, it’s clear much of the initial drag on growth came from investment spending as evidenced by the precipitous drop last year,” Mr. Rangasamy said.
“Sadly, the investment collapse is far from over.”
It’s not just oil.
“Adding insult to injury, Canadian manufacturing output was roughly flat in 2015 versus a 2-per-cent rise stateside,” said BMO Nesbitt Burns chief economist Douglas Porter.
“Canadian auto production fell 5.5 per cent for all of last year, to its lowest level in four years ... even amid a record year for vehicle sales in both the U.S. and Canada,” he added.
“Ouch. Assemblies for all of last year were 2.3 million units; aside from the troubled 2008-11 period, that’s the lowest level of annual auto production in Canada since 1993 and down 24 per cent from the all-time high in 1999.”
The pain is spreading.
“Energy producers remain in cost-cutting mode due to the persistence of low prices,” said Mr. Rangasamy.
“But even outside the energy sector, the outlook for business investment is anything but rosy. Corporations are struggling to generate profits in an environment of slow global growth and limited pricing power.”
There is, of course, a regional divide.
The energy provinces, notably Alberta, have been hit hard, but Toronto-Dominion Bank has cut its forecasts for Canada’s regions, though some are expected to still see economic growth.
“With the past year ending more like the proverbial lamb than lion, this forecast update contains broad-based downgrades to 2016 growth prospects from coast to cost, TD economists Derek Burleton, Michael Dolega and Diana Petramala said in their projections.
“The bulk of economists are still expected to expand this year, but at a slower rate than we had earlier envisaged, with only British Columbia and Ontario set to chalk up real GDP gains surpassing 2 per cent.”
Take a look at those ugly yellow diamonds for Alberta and the eastern provinces.
So many years after the financial crisis, Canada’s jobless level has climbed back up above 7 per cent. And according to TD’s forecasts, it’s going to stick at 7.1 per cent this year and ease only to 7 per cent in 2017.
“The oil producing provinces will continue to face significant chill winds this year,” the TD economists said.
“Real GDP in Alberta and Newfoundland is expected to contract for a second consecutive year and unemployment rates are likely to march to new highs in the coming months,” they added, though they do see more stability in 2017.
“Made in Canada” isn’t what it used to be.
While the faltering Canadian dollar is helping exports, the boost from that is “likely to be constrained by the loss of market share and reduced industrial capacity,” Mr. Rangasamy warned.
“Recall that despite a weaker currency and a stronger U.S. economy, non-energy exports remain well below levels reached eight years ago,” he added.
“So, the expected investment boost from exporters in response to better sales abroad may take a while and may not be as significant as first thought.”
Resource firms hit
As if to drive home the point, two Canadian resources companies are signalling more troubled times.
As The Globe and Mail’s Ian McGugan reports, Potash Corp. of Saskatchewan cut its dividend as it reported a lower profit and a dimmer outlook.
The company posted a fourth-quarter profit of $201-million (U.S.), or 24 cents a share, compared to $407-million or 49 cents a year earlier.
“Challenging conditions, including currency weakness relative to the U.S. dollar in emerging markets, continued to weigh on fertilizer markets through the fourth quarter,” it said.
“Cautious buying patterns resulted in deteriorating prices across all three nutrients as the year ended,” it said, referring to potash, nitrogen and phosphate.
Chief executive officer Jochen Tilk cited a “more cautious outlook” in the early days of 2016, but added he believes conditions will improve.
That was followed by Penn West Petroleum Ltd. cutting spending by a dramatic 90 per cent in the wake of the oil rout.
Its capital budget for the year is $50-million.
“Given the present state of the commodity price environment, our 2016 capital budget reflects the reality of living within our means at current price levels and managing the business on a week-to-week basis,” said chief executive officer Dave Roberts.
Economy minister quits
As if Japan’s economy weren’t in enough trouble, a key minister resigned today amid a brewing scandal.
Economy minister Akira Amari reportedly denied wrongdoing in the corruption allegations, and Prime Minister Shinzo Abe named a replacement, Nobuteru Ishihara.
Mr. Amari was a key player in Mr. Abe’s economic drive. Among other things, he helped negotiate the Trans-Pacific Partnership trade deal.
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