Regional shakeup: lower oil prices will have sharply differing effects on Canada's regions

Alberta could slip into recession.

CALGARY, Jan. 20, 2015 /CNW/ - Canada's economy will suffer from the shock of tumbling oil prices this year, especially from a sharp reduction in energy investment. A new Conference Board of Canada report released today at the Oil and Gas Summit 2015 in Calgary estimates Canada's economy will suffer a 0.4 per cent hit to growth this year. Lower oil prices will have sharply differing effects across Canada's regions and industries.

"While there are both winners and losers in the Canadian economy as a result of weaker oil prices, we expect the overall Canadian economy will see a modest net loss in growth this year," said Pedro Antunes, Deputy Chief Economist, The Conference Board of Canada.

HIGHLIGHTS

• Economic growth and government revenues for some provinces will be down sharply in 2015 as a result of lower oil prices.
• Alberta will experience the largest drop on GDP; total business investment could be down by $12 billion this year.
• A 40 per cent reduction in oil prices will lead to a $4.5 billion cut to royalty revenues in 2015—the lion's share of losses accruing to Alberta, Saskatchewan, and Newfoundland and Labrador.
• Economic growth and government revenues will also slow for the country as a whole.

The report, Regional Shakeup. The Impact of Lower Oil Prices on Canada's Economy, projects that world oil prices will recover to above the $60 mark by the end of the year—but this still represents a 40 per cent decline in crude oil prices in 2015.

Canada growth is forecast to remain in the 2 per cent range in 2015, in line with its tepid performance in recent years. Oil revenue losses will be partly offset by lower transportation costs and a boost in consumer spending from the drop in gasoline prices.

Indirectly, exporters may also benefit as lower oil prices help lift the economic fortunes of the United States, our key trading partner, but this benefit will take longer to be felt  and be weaker than in the past.

The economic outlook for oil producing regions such as Alberta, Saskatchewan, and Newfoundland and Labrador has been significantly affected. Not surprisingly, Alberta will experience the largest drop in real GDP as it is by far Canada's largest oil producer. In fact, the province could slip into recession in 2015. Saskatchewan and Newfoundland and Labrador will also be hurt, but not to the same degree as Alberta, because oil extraction is not as large a share of total provincial activity.

Alternatively, Ontario and Quebec will benefit the most from weaker oil prices. A combination of stronger U.S. economic growth and the weaker Canadian dollar will boost demand for exports from these provinces. However, the positive impact on Ontario and Quebec exporters will be limited by the fact that these provinces currently lack the industrial capacity to take full advantage of the anticipated increase in demand for exports over the near term. Higher investment spending will be required to boost capacity and thereby enable Ontario and Quebec to take full advantage of the weaker loonie and strong U.S. growth.

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SOURCE Conference Board of Canada

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