Following the recent crude oil price rally, economists say Canada’s economy risks getting caught inside a bind where oil costs are less than sufficient but the loonie isn’t quite low enough.
Canada’s dollar has had a powerful rebound in the past month, rising from about 68 cents from the U.S. dollar to 76 cents as of Monday. Oil prices also have rebounded nearly 50 per cent for the reason that time.
The Canadian economy has been feeling pressure of low oil prices for 2 years, causing recession in provinces such as Alberta and mass layoffs within the energy sector. But recent data shows that oil’s pain continues to be the manufacturing sector’s gain, as cheaper gasoline prices and a weak loonie have helped the country’s non-energy industry’s become more profitable.
Unfortunately, the recent moves in oil and the loonie could halt that shift.
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“Only recently are we started to see some positive signs originating from non-energy investment and production as corporate Canada started to reaction to the dollar depreciation,” said Benjamin Tal, deputy chief economist at CIBC World Markets. “This fragile recovery might be at risk as higher oil prices lead to a stronger loonie. To put it simply, we suffer the pain of a higher dollar with no gain of rising oil prices.”
Oil prices have rallied from slightly below US$30 in their low this season to more than $40 as of Monday, but Tal notes that the price gain isn’t enough to make a meaningful impact on Canada’s energy sector. Most companies will not even consider increasing capital spending or hiring unless prices move significantly higher.
At the same time frame, the gains within the loonie might have very real impacts on investment and job creation for manufacturing firms. Canada’s manufacturers happen to be burned through the loonie before, specially in the years following the financial crisis, where the loonie crashed from parity with the U.S. dollar down to below 80 cents – simply to rebound to parity two years later.
“The 6-cent appreciation in the value of the dollar can make a improvement in the decision making process for some (or many) manufacturing firms,” said Tal.
The developments leave Canada’s economy vulnerable to getting stuck in an “oil twilight zone” until oil prices either rebound to some level where energy firms start spending again or manufacturers and exporters see a clearer sign the loonie won’t be moving higher.
That will make for an interesting Bank of Canada rate announcement next month. It is likely Governor Stephen Poloz includes comments concerning the loonie whether it stays at this level or moves even higher before the April 13 meeting.
