Oil’s toll: Folks in Alberta, Saskatchewan, Newfoundland will be poorer

These are stories Report on Business is following Tuesday, Dec. 9, 2014.

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Slumping prices
Everyone and everything can expect to be that much poorer in Canada’s oil provinces.

“While the impact on Canada’s economy, in the aggregate, would likely be minimal, there would be substantial variations across provinces,” Royal Bank of Canada said in a new report.

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“Canada’s oil-producing provinces – Alberta, Saskatchewan and Newfoundland and Labrador – would face negative hits to incomes and, eventually, spending, while the rest of the provinces (all net oil consumers) would likely enjoy net benefits via a stronger U.S. economy and lower energy costs.”

In their latest analysis, RBC economists Paul Ferley, Robert Hogue and Nathan Janzen assume West Texas Intermediate, the U.S. benchmark, averaging $70 (U.S.) a barrel next year and $80 the year after.

“Our assumed profile for oil prices would point to a decline in the terms of trade (the ratio of export to import prices) of close to 3 per cent in 2015 followed by a modest recovery in 2016,” the researchers said of Canada as a whole.

“This would result in Canadian real gross domestic income (GDI), the most common measure of total real national income, growing just 1.9 per cent in 2015, almost a full percentage point below the 2.7-per-cent increase in real GDP we are assuming.”

(Such measures take in just about everything, from pay to profits.)

That’s for the country. Not so fast Alberta, Saskatchewan and Newfoundland.

The folks in those provinces will be poorer, and lower oil prices will potentially eat into spending by government, businesses and consumers alike, said Mr. Ferley, RBC’s assistant chief economist.

But certainly worth noting, he added, is the fact that those three provinces are coming off a position of strength where economic growth is concerned.

And, in the case of Alberta and Saskatchewan, low unemployment of 4.5 per cent and 3.4 per cent, respectively, and strong fiscal standings compared to the rest of the country.

Canada will, of course, be hit by the stunning slide in oil prices, though there are several “buts” in RBC’s scenario.

In its report, RBC added several “buts” to the equation.

But: Every 10-per-cent drop in oil boosts economic growth in the United States by 0.1 to 0.2 of a percentage point, which, of course, helps the Canadian economy.

But: The weaker loonie – every 10-per-cent drop in oil shaves about 1 per cent of the currency to the U.S. dollar – will help.

But: Lower gas pump prices also are the equivalent of a tax cut for Canadian families.

But: RBC projects the dollar at about 87 cents U.S. by the end of this year, and 85 cents by the end of next year. “Once accounting for these positive external effects, as well as the positive impact on the domestic consumer sector from lower gasoline prices, the assumed further drop in oil prices could actually increase the level of Canadian GDP in 2015, albeit by a very modest 0.1 per cent or so,” RBC said.

Lower oil prices could shave about 0.8 of a percentage point from economic growth in Alberta next year, which “would still keep the provincial economy well clear of a recession with growth being maintained in the vicinity of 2.7 per cent.” Growth could slow in 2016 to 2.3 per cent, still above the Canadian average, as long as oil heads back to the $80 range.

Oil sands projects should still forge ahead “largely as planned.”

Saskatchewan’s economy should show “greater resilience” than Alberta given the price assumptions. And it’s hard to assess Newfoundland.

Their loss, of course, is central Canada’s gain, to the tune of at least 0.3 of a percentage point for Ontario and about 0.2 of a point for Quebec.

Cross-border woes
The Canadian government took steps today to deal with the controversial – and annoying – price gap with the United States.

As The Globe and Mail’s Steven Chase reports, the government is giving the Competition Bureau the power to force testimony from executives at the Canadian operations of foreign concerns.

Even more important, the Competition Commissioner would be able to force the disclosure of agreements between global suppliers and their distributors in Canada.

The difference in prices has been a thorn in the side of consumers for some time, though that was many cents ago.

“I suspect that the gap has almost disappeared with the currency dipping to 87 cents (or almost disappeared),” chief economist Douglas Porter of BMO Nesbitt Burns said today.

“Some items will still be cheaper in the U.S., and perhaps considerably so, but many others will actually be less pricey in Canada at today’s exchange rate,” he added, referring to the erosion of the Canadian dollar amid the oil price slide and a Bank of Canada that’s in no rush to hike interest rates.

“Something close to this level was what we pegged as the rate that would equalize prices between the two countries. The one wrinkle is that Canada has run slightly higher inflation in the past year (i.e. our consumer prices have gone up more in the past year), but that gap is just 0.7 per cent (an amount the loonie can move in a morning).”

Markets volatile
Asian and European markets took it on the chin today, while North America fared better and Toronto actually made gains.

Asian stocks tumbled, led by the Shanghai market, which lost 5.4 per cent on new lending rules.

European stocks were also whacked, with Greece at the forefront.

And in North America, stocks fell to a far lesser extent by the time trading ended, while Toronto’s SP/TSX composite eked out a small gain.

The Canadian dollar, having touched a low of 86.97 cents U.S., perked up to almost 87.5 cents by late afternoon.

“Markets don’t like surprises but had three big ones on Tuesday that sent European shares for a tumble, as China shocked markets by tightening credit conditions by raising collateral standards on loans only weeks after loosening conditions by cutting interest rates,” said analyst Jasper Lawler of CMC Markets in London.

“At the same time Greece announced it will bring forward its presidential election to this month and Tesco announced a big surprise profit warning.”

Talisman’s play
Canada’s Talisman Energy Inc. confirms Spain’s Repsol SA is making new overtures, but adds that others are also kicking the tires.

“Talisman acknowledges that it has been approached by a number of parties, including Repsol, with regards to various transactions,” the company said late yesterday in a statement.

“There is no assurance that any transaction will be agreed.”

Talisman shares have suffered a lot this year, and, of course, have tumbled of late with the rout in the oil market, though they’re up today.

AGF to slash dividend
AGF Management Ltd. plans to slash its dividend by 70 per cent, The Globe and Mail’s Jacqueline Nelson reports.

AGF said today it will pay out its quarterly dividend of 27 cents a share in mid-January, but plans to slash its subsequent dividend to just 8 cents.

AGF is shaking up the way it returns capital to shareholders amid efforts to improve investment performance and introduce new business initiatives. The asset manager plans to renew its share buyback program in February next year.

Japan gets a warning
Fitch Ratings has given Japanese voters something to think about in the runup to the snap election.

The ratings agency today put Tokyo on “rating watch negative” in the wake of the government’s decision to delay the second round of a tax hike.

“Fitch’s analysis suggests Japan’s high indebtedness and low nominal growth make the debt dynamics relatively fragile to shocks to baseline assumptions,” it said.

“Fitch views the delay in the second-stage consumption tax as increasing risk to the baseline projection by strengthening doubts over the authorities’ commitment to the objective of fiscal consolidation.”

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