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TD cuts economic forecast due to low oil

Bank predicts another interest rate cut.

January 26, 2015   by The Canadian Press

OTTAWA — The squeeze of the oil slump is prompting one of Canada’s biggest banks to slash its 2015 forecast for the country’s economy and warn that another interest-rate cut could be on the way.

TD Bank said it now expects the Canadian economy to grow by just two per cent this year, down from its December projection of 2.3%. It foresees Canadian growth creeping back up to 2.2% in 2016, said a TD report to clients.

The big bank’s economists also predicted the Bank of Canada will trim its trend-setting interest rate in March by another quarter of a percentage point, to 0.50%. From there, it expects the key rate to remain on hold until the second half of 2016.

Last week, the central bank stunned financial markets and observers when it lowered its overnight-rate target by a quarter of a percentage point to 0.75%. Economists had expected the Bank of Canada to hold the rate at 1%, where it had been since September 2010.

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But in defending his decision, governor Stephen Poloz pointed a finger at the threat of low oil prices, which he called “unambiguously negative” for the Canadian economy.

Poloz indicated the goal of the central bank’s rate drop was to provide “insurance” against the risks cheaper oil poses to Canada’s inflation and financial stability.

“Those who hoped to return to greater market calm after the holidays have been sorely disappointed,” said the TD report.

“The drop in the prices of oil has gone further and been more protracted than anyone predicted only a few short months ago.”

The price of oil, which has been trading in the neighbourhood of US$45 per barrel, is less than half of where it was last summer, a change blamed on oversupply and a slowdown in the global economy.

TD expects the US benchmark price – West Texas Intermediate – will average US$47 this year before climbing back up to US$65 in 2016. Only a month ago, the bank forecast WTI to average US$68 in 2015 and US$80 next year.

TD now expects the loonie to continue its fall into 2016, hitting a low of 75 cents US early in the year before starting to move back up.

The report also underlined other impacts of low oil prices, which it says will save the average Canadian household nearly $900 at the gas pumps this year.

Additional consequences include job losses in the country’s oil-producing regions, where housing markets are also expected to suffer a blow.

On top of that, TD predicted government revenues in these energy-rich provinces – Alberta, Saskatchewan and Newfoundland and Labrador – to feel the pain of lower crude.

TD projected Alberta’s 2015 real gross domestic product to grow by 0.5% compared with its December forecast of 2.3%, while Saskatchewan is expected to grow by 1.3% compared with an earlier forecast of 1.7%. Newfoundland’s economy is forecast to shrink by 1.2% compared with growth of 0.3%.

In the span of a month, the bank dropped Alberta from its third-place ranking, in terms of expected growth among the provinces, to ninth.

On the other hand, the bank increased its projections for non-oil-producing regions. For example, Ontario’s 2015 outlook rose from 2.6% to 2.8.

At the federal level, Ottawa has also been bracing itself for lower revenues as a result of lower oil prices.

The Harper government recently made the unusual decision of postponing the federal budget until at least April, a move it hoped would buy enough time for a clearer picture to emerge on the impact of falling crude prices.

© 2015 The Canadian Press


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