Canada's economy will be just fine despite cheap oil, RBC says

Written By Unknown on Jumat, 12 Desember 2014 | 22.39

One of Canada's biggest banks says an increase in exports that aren't oil and an uptick in consumer spending because of cheaper gasoline prices should be enough to offset the impact on the economy from cratering oil prices.

In its latest market outlook, the Royal Bank of Canada says 2014 was a turning point for Canada's economy in that economists finally started seeing a long overdue increase in Canadian exports from things outside of the always volatile energy sector.

'The net impact of lower oil prices will be negligible'- Royal Bank economist Craig Wright

At least in the short term, Canada is likely to keep pumping out just as much — if not more — oil as it has been doing of late. But in dollar terms, the value of those exports will be much lower, so any growth is going to have to come from somewhere else.

The bank says that's a safe bet.

"Our outlook for Canada is predicated on the fact that the decline in oil prices and any weakening of investment in the oil and gas industry will be offset by increased demand for Canada's non-energy exports," the bank's senior economist Craig Wright said. "On a national level, looking ahead to 2015 the net impact of lower oil prices will be negligible in terms of real GDP."

That's great news for an export-driven economy such as Canada's.

If the export surge comes to pass, it should be enough to maintain and even increase the growth we've seen in Canada's economy. Add it all up and the bank is expecting GDP growth of 2.5 per cent this year, and growing to  2.7 per cent in in 2015 before retrenching a little to  2.1 per cent in 2016. Those forecasts are slightly ahead of what the Bank of Canada is forecasting.

"The outlook for Canada was muddied by the decline in commodity prices however on balance our analysis suggests that any weakening in investment in the oil and gas industry will be offset by increased demand for Canada's non-energy export​," the bank said.

It's worth noting, however, that the bank's somewhat rosy read on the economy is built on an assumption that the oil price won't keep falling.

The bank's forecasting the price for West Texas Intermediate at $70 for all of next year, and $80 in 2015. In reality, a barrel of WTi closed at below $60 on Thursday, when the loonie slumped to a new five-year low, below 87 cents.

Royal Bank is expecting an 85-cent US loonie, on average, though 2015, falling further to 82 cents in 2016.

The bank also says it expects the jobless rate to remain at around 6.5 per cent all next year, roughly in line with where it is now.


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