Falling oil prices, weaker Canadian dollar turn the tables on the provincial outlook: CIBC World Markets

Feb 17, 2015

Even if Alberta runs a big deficit, it would take decades before it's in the same debt situation as Ontario

TORONTO, Feb. 17, 2015 /CNW/ -  Falling oil prices and a now-weaker Canadian dollar have turned the tables on the outlook for provincial economies, finds a new report from CIBC World Markets.

"A dramatic drop in oil prices, juxtaposed against a still-healthy U.S. economy, has turned the tables on relative provincial growth, with Alberta at risk of a recession but central Canada's prospects brightening," says Avery Shenfeld, Chief Economist, CIBC World Markets, in a report co-authored with Economist Nick Exarhos. "We forecast Alberta to post the biggest budgetary shortfall, but it still remains the best positioned to weather the storm."

Alberta appears headed for a mild and short-lived recession, with at least two quarters of negative growth, the report says.

Real GDP in Alberta is forecast to contract by 0.3 per cent in 2015 before recovering to 2.3 per cent growth in 2016, the report says. Economic growth in 2014 is forecast at 4.1 percent. The unemployment rate in Alberta is expected to climb to 6.8 per cent from 4.8 per cent in 2014. Housing starts are forecast to decrease from 40,600 units in 2014 to 28,000 in 2015 and 34,000 in 2016.

The hit to Alberta's GDP growth will be less about producing fewer barrels and more about the squeeze on capital spending in the energy sector, the report says.

"There are some offsets, as the province's non-energy exporters will be helped by the weaker currency and its domestic spending will be supported by interest rate cuts," says Mr. Shenfeld, who forecasts oil prices to recover in the medium term. "Furthermore, Alberta can withstand the economic weakness given its strong fiscal position."

Indeed, even if Alberta ran a $5-billion deficit year after year and its economy grew at a nominal rate of just 1 per cent after 2016, it would take five decades for Alberta to reach the same debt/GDP ratio that Ontario planned for last year, the report says.

In central Canada, both Ontario and Quebec "could end up with a revenue fillip" - thanks to strengthening U.S. demand and the additional lift that exports will garner from a weaker Canadian dollar, the report says. For example, a 1 per cent acceleration in U.S. growth typically adds about 1.2 percentage points to Ontario's real GDP.

Mr. Shenfeld forecasts nominal GDP for both provinces to run about a half point above their original projections and those recently released in mid-year updates. "Both of these central Canadian provinces are budgeting for virtually no spending growth in an effort to contain borrowing needs, a tough bar to meet," he says. "The additional revenue might therefore give a bit of spending elbow room that will make the 2015-16 deficit targets easier to attain."

Ontario's economy is forecast to grow from 2.1 per cent in 2014 to 2.8 per cent this year and next, with the jobless rate declining steadily to 6.6 per cent in 2015 and 6.4 per cent in 2016. The unemployment rate in Ontario last year averaged 7.2 per cent.

Quebec real GDP growth is forecast to grow to 2.4 per cent this year and 2.6 per cent in 2016, up from an estimated 1.8 per cent in 2014. The jobless rate is expected to decline from 7.8 per cent last year to 7.2 per cent in 2015 and 6.7 per cent in 2016.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/if_cdnprovinces.pdf

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SOURCE CIBC World Markets

For further information:

Nick Exarhos, Economist, CIBC World Markets Inc. at (416)-956-6527, nick.exarhos@cibc.ca or
Caroline Van Hasselt, Director, External Communications, (416) 784-6699, or caroline.vanhasselt@cibc.com.


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