Canada’s “two-speed” economy will see much of the country benefit from the slide in oil prices, even as the nation’s Alberta-based energy industry takes a prolonged drubbing.
This narrative has been taking shape since last fall, and Bank of Canada Governor Stephen Poloz’s surprise decision to cut interest rates is expected to accelerate it.
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“It’s really like there are two economies. Like we’ve had for the last few years, there’s a really strong energy economy and a relatively lacklustre non-energy economy. Two speeds,” Mr. Poloz said Wednesday.
“And now what we have is the speeds will get closer together. One’s rising and the other one’s falling. But the immediate part is the fall, the oil price part, and the rest is just gathering momentum.”
The benefits will be particularly pronounced in Ontario and Quebec, the country’s manufacturing powerhouses. The two provinces exported a combined $229-billion worth of goods, ranging from automobiles to aircraft to steel to iron ore in 2013, the bulk of it to the United States.
“The way we see it here is that of course, we acknowledge that there are risks, financial risks” to falling oil prices, said Quebec Finance Minister Carlos Leitao in an interview. “But a still lower Canadian dollar, a well functioning U.S. economy, all that is very positive for Ontario and Quebec’s manufacturing sectors.”
Mr. Leitao said, even more than the slide of oil, a bigger kick to economic growth could come from increased business investment: manufacturers and other companies spending on new factories and hiring new workers – employees who will in turn spend their wages.
The Ontario government – which could certainly use a little financial breathing space as it wrestles down a $12.5-billion deficit – was trying to temper its glee.
“While lower oil prices and a stronger U.S. economy are generally positive for the Ontario economy, weak global demand and slower economic growth in Canada’s oil producing provinces would offset some of these positive impacts,” wrote Susie Heath, spokeswoman for Finance Minister Charles Sousa, in an e-mail. “Importantly, lower interest rates and a lower value for the Canadian dollar should both help to strengthen the outlook for the Ontario economy.”
Jonathan Bendiner, an economist at TD Bank, said the cut in interest rates should also boost consumer spending – helping to sustain momentum in the housing market, for instance. TD is predicting a drop in real economic growth in Alberta this year, while Ontario leads the country. Wednesday’s announcement will widen that gap.
“It’s a reversal of fortunes,” Mr. Bendiner said in an interview. “It’s a different dynamic in terms of the growth picture across provinces, compared to what we’ve seen in recent years.”
Benoît Durocher, senior economist at Desjardins Group, said Quebec will benefit a little less than Ontario because one of the province’s main problems – an aging population and shrinking work force – won’t be altered by cheap oil, a weak Canadian dollar or low interest rates. And he warned against predictions the economic centre of gravity in Canada will suddenly shift eastward.
“You can’t erase trends that have been present for years in one year,” he said. “The disparities that we are used to seeing between Canadian regions will start to dwindle a little. They won’t be erased.”
Mr. Leitao, a former chief economist with Laurentian Bank Securities, also characterized the new-found economic good luck as “temporary.”
“The global economy will eventually recover and demand and consumption of oil will eventually accelerate and prices will return,” he said. “I don’t know how long this will take, a year, two years. … But I see this [current situation] more as a temporary reprieve. So for us in Quebec, this is the time now to take advantage of this because it won’t last forever. The time is now to really modernize and improve our industrial infrastructure.”
With a report from Les Perreaux in Montreal