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Canada: waylaid by oil’s price drop; anticipating cheerier prospects

Canada: waylaid by oil’s price drop; anticipating cheerier prospects

After recording ‘real’ (i.e. inflation-adjusted) gross domestic product (GDP) growth of 2.4% in 2014 and 2.0% on average in the other four years since the 2008-09 Great Recession, Canada’s economy slipped ever so gently into reverse during the first half of 2015.

Q1 2015's GDP change was -0.8% (quarter to quarter annualized), followed by a marginally less negative -0.4% in Q2. On a monthly basis, industry-based GDP fell by 0.1% or 0.2% in January through May (not annualized), but then sprang to life in June, with a gain of 0.5%.

The hope is that June is a precursor of what to expect for the remainder of this year. The fact U.S. output growth has become more robust,with Q2 south of the border recently revised upward from +2.3% to +3.7%, is good reason to be optimistic.

While Canada has been gradually expanding its export customer base, especially to countries across the Pacific, America still accounts for the lion's share of all such sales, at approximately three-quarters of the total.

A major problem for Canada's foreign trade position since last summer has been the dramatic drop in the international price of oil, from near $100 USD per barrel to as low as $40. For Canadian producers, the plunge has been partly mitigated by the accompanying weakness in value of the Canadian dollar versus the U.S. greenback, from parity to below $0.80 USD.

Most widely-traded commodities, including fossil fuels, are priced in U.S. dollars. Therefore, during periods when exchange rates are fluctuating significantly, the 'profit and loss' return to owners can only be determined after there has been a currency adjustment. While it's small consolation, this has been working to Canada's advantage.

Nevertheless, the severity of Canada's export losses from the oil price decline are readily apparent in the figures from each of the nation's four largest energy-producing provinces.

In 'current' (i.e. not adjusted for inflation) rather than'constant' dollars, energy exports year to date through June from Newfoundland and Labrador were -41.4%; from Saskatchewan, -37.3%; from Alberta (by far the biggest producer among the provinces), -30.4%; and B.C., -26.9%.

For the country as a whole, energy products as a percentage of total exports have fallen to only 18% in the first half of 2015, down from 26%, or over one-quarter, during the same time frame in 2014.

There are three reasons for the nosedive in value of the'loonie' (the affectionate nickname given to Canada's coinage). For starters,it's become impossible to keep up with the U.S. dollar, driven higher by an economy that is performing at an increasingly exuberant level (e.g., an unemployment rate of only 5.3%) and an expectation that the Federal Reserve will soon begin raising interest rates, after standing pat for six years.

The second is due to Canada's ongoing, but sometimes not adequately recognized, reliance on raw materials production. The prices for nearly all commodities, extending beyond just oil and gas into metals and minerals and agricultural products, have retreated into fallback positions from their previous peaks.

Raw materials demand worldwide remains lacklustre on account of underperforming economies in Europe and China. The former is still struggling to extricate itself from the Greek debt crisis.

In the latter, nascent stock market activity has been rocked by wild fluctuations, the banking sector is saddled with questionable real estate loans and estimates for overall growth have been scaled back from +10.0%to +6.0%, and even that may be too rosy.

As a third cause, two interest rate cuts of 25 basis points each (where 100 basis points equals 1.00%) by the Bank of Canada (BOC),lowering the key policy-setting 'overnight rate' from 1.00% to 0.50%, and designed to stimulate the economy, have had a lower-valued loonie as a side effect.

That's been OK with the BOC so far, because it should help revive the export sales of Canada's manufacturing sector, based primarily in Ontario and Quebec. The Canadian auto sector's sales, domestically, have launched into orbit. They will likely exceed 1.9 million units in 2015,establishing a new annual record.

The U.S. motor vehicle market, which also places demand on Canadian producers, has been almost as buoyant. South of the border, passenger and light truck sales will climb to 17 million units this year, as high as they've ever been in any given year going back over decades. Too often, when considering investments in new facilities, however, car makers are choosing other countries, such as Mexico, instead of Canada.

Canada's labour market data, specifically for manufacturing,has been slow to show the benefits of a bargain exchange rate. The total number of manufacturing jobs in the country has remained stuck at about 1.7 million for the past six years. Ten years ago, the figure was more than one-third higher, at 2.3 million.

Thankfully, total employment in Canada is up by a decent measure, 161,000 jobs year over year and 102,000 year-to-date in June. The average month-to-month increase in employment this year has improved to 15,000 from 9,000 in the same January to June phase of last year.

While the nation's unemployment rate has barely budged over the past 12 months, sticking close to 6.8%, Statistics Canada says that if it adopted the same strict criteria as in the U.S. to calculate who is seriously looking for work, the figure would be almost identical with America's 5.3%.

 This is an excerpt from The Leaders – Canada's Best in Construction: 2015 Edition – published in November by CMD. For information, visit www.leadersinconstruction.ca.


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