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Commodities drop will pain some provinces

Alberta, Saskatchewan and Newfoundland-Labrador will be especially hard hit.


August 25, 2015
by CANADIAN PRESS

CALGARY — Commodity prices are tanking and they’re bringing Canadian markets down with them, but experts say some provinces will be feeling the pinch more than others.

“It’ll feel like a recession depending on where you live in the country,” said John Stephenson, chief executive of hedge fund Stephenson & Co. Capital Management.

He said everything from oil to metals to lean hog prices are dropping as weaker growth globally weighs on demand.

“Virtually everything is down in price, and significantly down, not just a little bit,” said Stephenson.

The drop in commodities means petro-powered provinces like Alberta, Saskatchewan and Newfoundland and Labrador will be especially hard hit, while the manufacturing heartland of Ontario and Quebec could get a boost from the lower Canadian dollar, says Robert Kavcic, senior economist at BMO Capital Markets.

Canada’s energy producers are hurting as the North American oil benchmark dropped to a fresh six-year low Monday, closing at US$38.24 a barrel.

At those prices, many producers are losing money on every barrel they pump out of the ground, said Kavcic.

“It’s getting to be a lot tougher in the energy sector now. You could actually start to see some production scaled back.”

The recent drop in oil prices has Todd Hirsch, ATB Financial’s chief economist, predicting a mild recession for Alberta this year and a sluggish recovery next year after forecasting in June that the province would avoid such an economic decline.

“Since that time the situation has changed pretty dramatically,” said Hirsch.
He said the fall in oil prices earlier in the year was just an oversupply issue, but crude is now also being hit with a potential drop in demand as cracks start to show in China’s growth.

Stephenson said commodities will drop further as investors realize how slow the Chinese economy is actually growing. He estimates the country is growing at three per cent, compared with the government figure of 7%.

“Its weakness is really problematic to the global markets,” said Stephenson.

But while China’s economy begins to waver, the US economy is showing continued strength, with good consumer spending and strengthening residential construction, said Kavcic.

He said the strong US housing market has bolstered Canada’s lumber industry, which is one of the few Canadian commodities doing relatively well.

US markets have also helped the manufacturing sector, which he said is improving despite the drop in spending by the energy industry. The industry is also getting a boost from the low Canadian dollar, which closed down 0.54 of a US cent at 75.40 cents US on Aug. 24.

“When you consider the Canadian dollar, plus US demand combination, plus the benefit of lower energy costs though the manufacturing production chain, you probably end up getting a net positive,” Kavcic said.

Kavcic says BMO expects to see two per cent growth for Canada’s economy as a whole in the second half of the year and through 2016 as the dramatic spending cuts in the energy sector start to level off and other sectors improve.

“The better outlook in Ontario and Quebec and the export sector, and still decent consumer spending and housing environment should be enough to keep us out of a full-scale prolonged recession.”

© 2015 The Canadian Press

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