Canadian Economy Takes a Hit from Low Oil Prices

March 25, 2015Canadaby EW News Desk Team

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TD Bank predicts the Canadian economy will shrink in 2015 because of low oil prices. According to the report, the effects will be noticeable in the first few quarters, but growth expects to pick up in late 2015.

The report basis is about the prediction that oil prices will fall to $40 a barrel and then rise to around $65 a barrel for 2016. TD further notes that annual growth will be 1.9 percent in 2015, which is a downgrade from a forecasted two percent during January. The Bank of Canada predicted slightly less than 2.1 percent growth.

Chief economist Craig Alexander states that first quarter growth will come in at an annual 0.5 percent. More workers contend with lay-offs and wage cuts as the energy industry adjusts to lower oil prices. Further, corporate profits are down, and there is less investment in the energy field as a whole. Unemployment expects to rise from 6.8 percent to 7.0 percent by the end of the year. There are high unemployment concentrations in the oil and gas industry, including the business and service sectors, two areas that cater to the needs of the energy industry.

Diversification Will Save Canada

Canada's economy is diverse and Canadians did not make the mistake of placing most of their bets on oil. Only 25 percent of Canada's exports derive from energy sources, while the remaining 75 percent is non-energy related. In fact, exports not pertaining to energy increased, and the manufacturing sector alone is surging to levels reached before the recession began. The only problem is that the manufacturing sector currently does not have the full capacity to compensate for losses in the oil and gas industry. Manufacturing exports will have a positive effect in due time but not for 2015. Local economies centered on crude production are bearing the full brunt of low oil prices, but Canada in general will benefit from a weak Canadian dollar and a stronger U.S. economy. U.S. demand for Canadian goods expects to grow, and low interest rates are keeping the nation from further economic turmoil.

Consumers Feel the Pinch

Canadian consumers have been saving money at the pump, but there are some problems. First, wage growth has not kept up with the pace of the economy, which means consumers do not have enough money to contribute to economic growth. In addition, Canadians are saving around $800 in heating and oil expenses, but $600 of that money is going to higher grocery prices and other products made more expensive due to a weaker Canadian dollar.