TORONTO (miningweekly.com) – The continued slide in crude oil prices will weigh on Canadian economic growth over the next few years, despite being offset by ultralow interest rates, a weaker Canadian dollar, resilient growth in the key US export market and energy cost savings for consumers, economists at Toronto-Dominion Bank (TD) Economics believe.

"No matter how you parse it, the overall impact on the Canadian economy of lower oil prices is negative. That said, there are offsets to lower oil prices on the economy, and some regions are going to benefit from these economic tailwinds more than others,” TD Economics chief economist Craig Alexander said in the group’s latest quarterly economic forecast released on Tuesday.

North American West Texas Intermediate crude had experienced a precipitous fall from $115/bl in June last year, to about $45/bl in January. It was trading at about $47.38/bl on Tuesday.

TD Economics expected the Canadian economy to grow by about 2% this year and in 2016; however, much of this growth was expected to come from non-oil-producing provinces, as energy-rich regions of the country could expect slower growth relative to recent trends.

“Sliding commodity prices are expected to have the most adverse effect on corporate profits in 2015 with a notable spillover into business investment and, ultimately, households through softer employment and income growth. Indeed, the unemployment rate could reach 7% by the end of this year, before falling back toward 6.7% by the end of 2016,” TD Economics noted.

Income growth in Canada was also expected to be hard hit, as nominal gross domestic product growth was likely to expand by a mere 1.3% this year. Weak income growth was likely to be particularly acute in oil-producing provinces and would, therefore, act as a significant drag on their governments' revenues.

"This is the slowest pace of income growth outside of a recession in recent memory," Alexander added.

Consumers would continue to see some relief in the form of lower prices at the pumps. TD Economics estimated that, for the average Canadian household, these savings would amount to about $800 in 2015. However, about three-quarters of this saving would be needed to pay for the higher cost of consumer goods resulting from the lower dollar.

With energy prices and the dollar expected to move lower over the next few months, TD Economics forecast headline and core consumer price index (CPI) inflation to move in different directions. Led lower by falling oil and natural gas prices, headline CPI inflation was expected to dip into negative territory in the second quarter of this year, before moving higher over the outlook. In contrast, core CPI inflation was forecast to stay at around 2% over the projection, as the lower dollar kept the cost of imported goods elevated.

With the Canadian economy subject to these cross-currents, the Bank of Canada was expected to keep interest rates on hold through to the end of 2016.

“With most indicators pointing to an economy that has weakened, but is underpinned by solid fundamentals, lower interest rates for longer will no doubt be welcomed by households. As such, we expect the Canadian housing market to hold up, albeit likely to expand at a more moderate pace and with significant diversity in outcomes across regions,” Alexander said.

SOUTH OF THE BORDER
The quick decline in oil prices had, meanwhile, shaken up North American growth prospects for the rest of the year and, while US energy output was concentrated in a few states, there would be a clear divide between the winners and losers, an analysis by IHS Global Insight’s US regional economist Karl Kuykendall had found.

Energy-producing states were already feeling the sting from the low-oil-price environment and companies had been quick to slash spending on new exploration.

Kuykendall said the timeliest indicator was the state-level rig count, which showed where energy exploration was most intensive and where it had now rapidly fallen off as prices nosedived. Rig counts had plummeted by 39% from late October, with further room to fall.

Texas alone accounted for nearly one-half of total US land rigs, followed by Oklahoma, North Dakota and New Mexico, which together were the largest US oil producers in the Lower 48.

In Colorado, the state’s nascent oil plays had also been stymied by the price declines. Louisiana, Pennsylvania and Ohio were also high-rig states, but counts there had been less impacted owing to these states’ energy output being geared towards natural gas, which was not expected to see a similar decline in drilling activity this year.

“The falling rig counts are too recent to show up yet in the state economic data, but their impacts will appear as the year progresses, as fewer operating rigs translates into fewer jobs,” Kuykendall said.

As with rig counts, Texas dominated US energy employment with close to 400 000 jobs – more than the other top six states combined. Because of the size of the overall state economy, though, oil and gas jobs made up only 4% of total private employment in Texas.

Kuykendall noted that Wyoming had the biggest share of jobs related to energy, at 9.5%, but it was not at the greatest risk from low oil prices owing to its sizable natural gas industry. North Dakota’s energy industry, on the other hand, was mainly tied to oil, which made it the state most exposed to lower prices.

Although exploration activity was expected to continue declining this year, oil output would nevertheless still increase.

“Companies will continue to extract oil from existing wells and increase drilling in the most efficient plays. The rigs being taken offline will be concentrated in marginally producing regions; as a result, oil production will be higher in 2015, although the pace of growth will level off as the year progresses. Therefore, the negative impacts of low oil prices this year will be concentrated in the upstream activities (drilling and exploration) with downstream activity (refining and petrochemicals) holding up well and, in some instances, benefiting from lower oil prices,” Kuykendall said.

As a result of the oil price deflation, IHS Global had downgraded its real gross state product outlook for all of the top oil-producing states.

North Dakota’s forecast was lowered the most from the firm’s November forecast to now, with the recent oil-price drop having pushed the state from solid growth to a decline – a direct result of how heavily invested in the oil industry its economy had become.

Oklahoma’s outlook was also cut in half as a direct result of reduced capital spending. New Mexico, Alaska and Wyoming were also expected to see economic growth decelerate by about 0.3%.

Fewer new jobs would be created in the oil-producing states, despite the analyst not expecting the decline in the growth rate to be as severe as what was seen with the gross state product, given the capital-intensive nature of the energy industry.

“On the flip side of the coin, there are many states that will benefit from the gasoline price decrease. At the top of that list are Nevada and Florida, two states heavily dependent on consumer spending, tourism and sales tax receipts for their state revenues.

“Indeed, a total of 41 states saw their employment outlooks increase this year between our March and November forecasts thanks to the changing economic environment, including lower energy prices,” Kuykendall said.