Canadian Manufacturing

Low oil prices could ding Canada’s GDP: BoC

Bank of Canada president Stephen Poloz said a quarter-point drop was big because the bank is only predicting moderate growth



OTTAWA—Bank of Canada governor Stephen Poloz estimates that if low oil prices linger they would cut the growth of Canada’s gross domestic product by a quarter-point in 2015.

The central banker shared the projection with the Senate banking committee before he added that such a reduction would be serious enough to give him pause.

The first question he fielded, from Alberta Sen. Doug Black, was about the effect of the tumbling price of crude on Canada’s economy.

“We would estimate that at this stage that effect, net, on Canada would be to take perhaps a quarter point off Canada’s GDP growth for 2015—which is sufficient for me to think about it and be concerned about it,” Poloz replied during an appearance that followed last week’s release of the latest monetary policy report and interest-rate announcement.

Poloz underlined the significance of a quarter-point drop because the bank is only predicting moderate growth in the two- to 2.5-per-cent range. Canada, he added, needs more than two-per-cent growth to help close the output gap and create jobs.

“A quarter point matters quite a lot in that context,” Poloz said, noting the bank reached that estimate based on the assumption prices would stay relatively low.

His testimony came a day after Canada’s junior finance minister said the government was carefully monitoring how public finances could be affected by falling oil prices as it prepares to release its fall fiscal update. The government is expected to table the update soon, but no date has been announced.

Kevin Sorenson insisted even as energy prices erode tax revenues, the government still believes it can deliver on its promise to balance next year’s budget and introduce tax cuts.

Earlier this week, the price of oil dipped below US$80 per barrel after a Goldman Sachs report projected crude would fall to US$75 in 2015 with expanding shale production and supplies exceeding demand.

As he put the question to Poloz, Sen. Black noted how the price of per-barrel oil had already fallen about 25 per cent since the start of the year.

In his response, Poloz said the slide is the result of lower global demand combined with a growing supply, particularly from the shale formations in the United States.

Later in the hearing, Poloz said the bank used a price of $85 per barrel to produce the estimate of a quarter-point loss in GDP growth.

“At this point we, of course, really don’t know whether this price will be sustained,” Poloz said.

Poloz, who appeared Wednesday alongside deputy governor Carolyn Wilkins, was set to testify at the committee last week. The hearing, however, was postponed following the deadly Parliament Hill shooting.

He also had a scheduled appearance before the House of Commons’ finance committee, which was cancelled after the attack.

Last week, the bank’s monetary policy report said low borrowing rates have been a contributor to “renewed vigour” in consumer spending and the real estate market since July.

The bank maintained its trend-setting interest rate at one per cent.

The report also stressed the need for Canadian economic activity to begin shifting from the shoulders of households to business investment and exports.

Poloz said Wednesday that Canadian companies have begun to make small investments in their operations, but they have yet to increase capacity as they wait for the export opportunities to improve.

The weak Canadian dollar, along with strong U.S. demand, are giving exporters ideal conditions to boost their sales, he added.

Related Posts from the network