Canada’s Surprise GDP Growth to Fade in 2015 on Cheap Oil

Canada’s economy will probably weaken in 2015 as a slump in oil prices cuts exports and investment, in contrast to a report today that showed growth beat economist forecasts in October.

Gross domestic product for the month expanded 0.3 percent, Statistics Canada said from Ottawa. That exceeded all 18 projections in a Bloomberg Survey of economists. November’s report will probably be bleaker, corresponding to an 18 percent plunge in the price of crude oil, the country’s largest export, which is down by almost half since June.

Growth may slow to 2.2 percent next year on an annualized basis, from about 2.5 percent this year, Sal Guatieri, a senior economist at BMO Capital Markets, said by phone from Toronto.

The October energy gain “is probably the final fling we will hear from that sector given the plunge in oil prices,” Guatieri said by telephone from Toronto. Growth will probably weaken to below 2 percent in the first half of next year because of the energy sector, Guatieri said.

Bank of Canada Governor Stephen Poloz has said cheaper crude may slow 2015 growth by a third of a percentage point, even with a weaker currency helping manufacturers, as well as a gathering expansion in the U.S. A drop in drilling led a 1.6 percent decline in support services for mining, oil and gas companies in October, the statistics agency said today.

Oil Pain

“Because of the price of oil, we are starting to see Alberta and Saskatchewan hurting,” Alain Bedard, chief executive officer of the Montreal-based trucker TransForce Inc., said in a Dec. 8 telephone interview. “As far as the Canadian economy in 2015 is concerned, the only good news is that we will start to see some improvement in exports because the U.S. economy is improving.”

Canada’s currency depreciated as much as 0.3 percent after the report before erasing losses and trading little changed at C$1.1622 per U.S. dollar at 10:47 a.m. in Toronto. It reached C$1.1674 on Dec. 15, the weakest since July 2009.

“We are encouraged that the economy is keeping its pace coming down the home stretch of 2014,” Nick Exarhos, an economist at CIBC World Markets in Toronto, said in a note to clients today. “But the real worries lie in what the collapse in crude means for next year.”

Output rose to an annualized C$1.65 trillion ($1.42 trillion) after a September gain of 0.4 percent, Statistics Canada said in Ottawa. The median forecast in a Bloomberg economist survey with 18 responses was for GDP growth of 0.1 percent. The highest forecast was for growth of 0.2 percent.

Reduced Investment

October GDP growth was led by the 2.6 percent jump in education services, the fastest since December 1997, as a British Columbia labor dispute ended. Oil and gas extraction rose 1.5 percent.

Energy companies have announced reduced investment in response to the global plunge in prices for crude oil, Canada’s top export, and Finance Minister Joe Oliver has cut his surplus forecast for 2015.

Canada sells three-quarters of its exports to the U.S., which today said that third-quarter output expanded at a 5 percent annual rate, the fastest in more than a decade.

There are signs growing demand from south of the border is helping. Canada’s manufacturing expanded 0.7 percent in October led by petroleum, coal, chemicals and plastics, Statistics Canada said. Mining and quarrying grew by 1.5 percent.

“While weaker oil prices are having a significant impact on the West, it’s not a devastating impact,” Royal Bank of Canada chief executive officer David McKay, 51, said in his headquarters in Toronto on Dec. 18. “There will be adjustments but it will have a beneficial impact to Central Canadian economies -- Quebec, Ontario.”

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