TORONTO—Falling oil prices will shift the balance of power among Canada’s provinces this year, with Alberta expected to see its growth rate slashed in half, according to Bank of Montreal chief economist Douglas Porter.
Meanwhile, Ontario and British Columbia will battle it out for who will see the fastest growth in 2015, Porter said during a panel discussion hosted by the Economic Club of Canada.
“Unfortunately it’s a bit of a race of the turtles as we’re looking at maybe 2.5 per cent growth in those two provinces,” Porter said.
Last year, Alberta’s economy grew by 3.9 per cent, according the province’s website.
Alberta has led all Canadian provinces in gross domestic product (GDP) growth over the past two decades, with average annual growth of 3.5 per cent per year.
National Bank of Canada chief economist Stefane Marion said it will take some time for Ontario’s manufacturing sector to be able to capitalize on lower production costs brought on by cheaper oil.
That’s because much of the excess capacity Ontario once had in its factories was gutted during the financial crisis and subsequent recession and it will take time to rebuild, Marion said.
“We do have the ability to offset the oil price in terms of the energy price decrease but it will take time,” Marion said. “That doesn’t happen overnight. We don’t have the same amount of spare capacity that we had in previous oil shocks.”
However, Marion predicted the pain won’t be long-lasting.
He said oil prices could return to US$60 barrel in the first half of the year, and US$70 barrel in the second half.
Oil prices have been falling since June, slipping 55 per cent amid a glut of global supply.
This week, the February crude contract in New York dropped below the US$50-a-barrel mark to US$49.14.
CIBC chief economist Avery Shenfeld said if oil prices begin to recover in the second half of the year, he expects the Bank of Canada (BoC) to raise its key interest rate by one quarter of a point.
However, if oil remains low and Canada’s economy is at risk of growing at a rate below two per cent, Shenfeld doesn’t anticipate any interest rate increases from the central bank until 2016.
The bank has held its trend-setting interest rate at one per cent for more than four years.
Scotiabank chief economist Warren Jestin said Canadian manufacturers and exporters are likely to see a boost in demand thanks to growth in the United States and a lower loonie.
But he said the increased demand for Canadian goods isn’t translating to an increased investment in the manufacturing sector.
“We’ve got more people producing autos now that the U.S. demand is there … but that’s a cyclical recovery,” Jestin said. “We’re not getting the investment longer term. It’s going to Mexico. It’s going to the U.S. South.”
Shenfeld said the Canadian dollar will likely need to drop further before automakers start building new plants north of the border.
“We’re trying to find the level of the exchange rate that makes Canada look a bit more like Tennessee—in other words, a cost effective place to put that facility in—and we’re not there yet,” Shenfeld said.
Although Ontario is more competitive than it used to be, it still has higher electricity rates than some other jurisdictions, Shenfeld said.
“We’re probably going to need to see a weaker currency to make Canada, Ontario, Quebec, the place to install that next plant,” he said.