Canada’s economy will take longer than two years to recover as the drop in commodity prices reduces aggregate earnings and an export rebound takes time to build.
National aggregate earnings will be 2 percent lower by the middle of this year because of declining commodity prices, Bank of Canada Deputy Governor Lynn Patterson said in the text of a speech to be delivered Wednesday in Edmonton. The adjustment process from lower commodity prices -- crude prices alone are down about 60 percent since the highs of 2014 -- will spread across the country.
“The impact of lower real incomes is gradually building,” Patterson said. “We expect it become the dominant source of drag on the economy by 2017.”
Patterson’s speech is the first from a member of the central bank’s governing council since Prime Minister Justin Trudeau’s federal government delivered its budget on March 22, in which it outlined plans to run about C$120 billion in cumulative deficits over the next six years. The bank will update its estimates with those numbers at its next interest-rate decision and monetary policy report on April 13.
Policy makers must balance the risk of the lingering effects of the oil shock with what have been fairly positive economic data recently. Factory sales in January surpassed even the most bullish economist forecast, with the inflation-adjusted value reaching levels not seen since the financial crisis.
The central bank said in January the “protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions.”
Crude oil prices are back to above $38 a barrel, from below $27 in January. Commodities accounted for 41 percent of Canadian exports in the last quarter of 2015.
Patterson said labor markets may be adjusting to the economic shift more quickly than in the past, with the gap between affected provinces and the national average no greater than 4 percentage points. Between 1976 and 1997, the gap reached as high as 5.5 percentage points.
“Our best guess is that the full adjustment will take longer than two years, our normal forecast horizon,” Patterson said.