Diverging economic paths for two provinces, predicts RBC

Diverging economic paths for two provinces, predicts RBC

Diverging economic paths for two provinces, predicts RBC

Until recently, observers watching guidance from the Bank of Canada have had no reason to expect anything other than continued hawkishness in monetary policy for 2019. But in its most recent decision to hold rates at 1.75%, the central bank highlighted recent economic developments that it will consider moving forward.

“The persistence of the oil-price shock, the evolution of business investment and the bank’s assessment of the economy’s capacity will also factor importantly into our decisions about the future stance of monetary policy,” the bank said in a statement.

That means that unlike the US Federal Reserve, the BoC faces a more complicated decision in timing its next rate hike, noted RBC in its latest Economic Outlook Report. Slumping oil prices, higher interest rate, and other adverse conditions have formed a debilitating cocktail for the Canadian economy in the final leg of 2018.

Rising rates have caused consumer spending, a major tailwind in recent years, to soften. Higher interest rates, coupled with regulatory changes, have also led to a correction in the housing market; aside from a 10% drop in sales, the sector say prices accelerate by less than 3% on average this year, compared to the double-digit increases observed over the past two years.

Focusing on the energy sector, the bank noted that oil producers are getting pinched by recent price declines along with forced production cutbacks in Alberta. The province has deemed the cuts necessary amid transportation bottlenecks and refinery shutdowns that have led to oversupply and significantly lower oil prices.

“These cuts are expected to bring inventories back to more normal levels but at the cost of economic growth in Alberta and to a lesser extent, the overall economy,” RBC said. “We shaved the forecast for Alberta by about 1 ppt to 1.5% in 2019, and estimate this will lower national GDP growth by 0.1 to 0.2 ppt.”

The resulting GDP growth forecast of 1.7% will have Canada’s economy running just shy of its potential, the report said, which is unlikely to have a significant effect on core inflation or the labour market.

There is a possible bright spot: the bank expects British Columbia’s economy to thrive next year. Citing the ramp-up in construction of LNG Canada’s $40-billion liquefied natural gas export project, the bank said investment spending in the province will be boosted substantially. The upshot: 2.6% growth in 2019 — higher than the 1.9% from the previous outlook — which is likely to continue into 2020.

“Given that LNG Canada has indicated that it will spend $18 billion in Canada in the first five-year phase, mostly in B.C, we expect this activity will provide a shot in the arm to the provincial economy,” said RBC Senior Vice President and Chief Economist Craig Wright. But he also warned that given the province’s record-low unemployment levels, its labour market might also see further strain as a result.


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