By: Frehiwote Negash
The fall in oil prices in the last eight months has begun to wreak havoc on the economy and Canadians are starting to feel the effects. The Albertan government announced that 31 000 jobs could be lost by the end of the year should oil prices remain stagnant. Energy companies like Suncor have cut their capital budgets and laid off workers with unemployment at 5.4{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce}; up from 4.7{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce} last year. While Alberta still expects to avoid a deficit this year, revenues will take a massive hit with investments in the oil fields dropping by about 30{92d3d6fd85a76c012ea375328005e518e768e12ace6b1722b71965c2a02ea7ce} this year reducing the number of on-going projects and halting exploration. The collapse in energy sector will wipe out an estimated $23 billion in profits for corporations and reduce government coffers in the next two years. The fear is that the drop in oil prices could spur a recession in Alberta; a belief that Premier Jim Prentice disagrees with yet it’s still too early to assess the damage. The Albertan economy will slow dramatically over the course of the next year but that does not necessarily mean that its will contract every quarter. Whether we care to admit it, Canada’s energy sector represents a significant portion of our economy and its performance impacts every Canadian.
In the immediate short term, the fall in oil prices translates into more money in consumer pocketbooks as it is estimated that the average Canadian will save $1000 this year at the gas pumps. In the long-term, the oil collapse translates into lower incomes for Canadians overall thus increasing the debt-to-income ratio and with the inconsistent performance of the labour market in recent months, can lead to economic instability; a situation the Bank of Canada wants to minimize if not entirely avoid. The Bank of Canada’s recent rate cut in January with the Canadian dollar falling was explained by Bank Governor Stephen Poloz as an opportunity for the central bank to assess the impact of the energy sector on the Canadian economy. Their position is that even with the oil shock hitting Alberta hard in the coming year, there is room for the Canadian economy to grow. Poloz argues that the lower Canadian dollar, the recovery of the American economy and the central bank’s monetary policy of late will be key factors in helping to boost the economy. The next time the Bank of Canada will announce the lending rate will be March 4 along with the release of the Monetary Policy Report issued at every quarter which hopefully will provide a clearer outlook on the state of the economy.
Source: Globe and Mail, Toronto Star, Financial Post