Canada Finds Out This Week if Economic Engine Runs Without Oil

  • Poloz rate decision and quarterly GDP lead busy economic week
  • Clues sought on damage from oil crash and momentum elsewhere

Canadians find out this week how well their economy functions without oil as the main driver.

The nation’s statistics agency reports gross domestic product for the third quarter Tuesday. Economists in a Bloomberg survey predict annualized growth of 2.3 percent, after a plunge in oil prices below $50 a barrel triggered two quarterly contractions to start the year.

On Wednesday Governor Stephen Poloz will give the Bank of Canada’s view on the recovery, in a statement that accompanies the latest interest rate decision. Poloz is expected to leave the key lending rate at 0.5 percent, according to all 33 economists surveyed by Bloomberg. He may also reiterate his expectation that non-energy companies and rising U.S. orders are starting to lead a recovery, particularly in the traditional manufacturing hub of Ontario and Quebec.

“I do expect the data to confirm that a recovery is happening in Canada,” Luc Vallee, chief strategist at Laurentian Bank Securities in Montreal, said in an e-mail. “But the good news out of central Canada won’t be good enough to compensate for the bad news coming out of the west.”

New Language

The Bank of Canada, whose inflation target is 2 percent, says the true trend of inflation is between 1.5 percent and 1.7 percent. Any new language on the inflation risks could signal when Poloz may move rates again. Vallee predicted the central bank will stay on the sidelines on Wednesday.

The week closes with data that will test Poloz’s theory of momentum outside the oil patch, as Statistics Canada publishes two key fourth quarter reports -- the October trade balance and November employment.

Crude oil’s rise to more than $100 a barrel earlier this decade made energy Canada’s top export and drew tens of thousands of workers from across the country to Alberta’s crude deposits. The oil crash has reshaped the economy again this year with automakers reclaiming the top export spot and oil companies canceling projects.

Poloz has said shipments of goods such as timber and metals will take over as the driver of economic growth in the second half of the year. Signs of progress on that front will show up in the trade balance and any swings in employment in the natural resource category.

Consumers have carried the load for years in Canada’s economy, driving growth as they made big-ticket purchases such as housing and cars. That has also fostered record home prices and debt loads that have drawn warnings about whether it’s sustainable.

The GDP numbers and Poloz’s comments may outline if consumer spending will continue. Canada Mortgage & Housing Corp. Chief Executive Officer Evan Siddall also speaks Thursday in Montreal and may give another update on what he said Monday in a speech in New York was “moderate or strong evidence of overvaluation” in the five largest markets. That underscores Poloz’s delicate balancing act -- in theory, cutting interest rates would spur growth by easing access to financing, however it would also worsen household-debt imbalances.

Stefane Marion, chief economist at National Bank of Canada in Montreal, suggests Poloz has time before he needs to act one way or another.

The drag of lower commodity prices and the prospect of momentum from a U.S. recovery allows Poloz to signal “a stay-put strategy,” said Marion. “I don’t think there is a need for a rate cut.”

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