the view from Canada

Yesterday the Governor of the Bank of Canada, that country’s central bank, announced it was lowering short-term interest rates from 1% to .75% as an “insurance” measure to help the Canadian economy adjust to lower oil and gas prices.  The move doesn’t come as a huge surprise, given that the oil and gas industry is close to 10% of the Canadian economy and has been accounting for about a third of its GDP growth.

In the words of Governor Stephen Poloz, “The drop in oil prices is unambiguously negative for the Canadian economy.  Canada’s income from oil exports will be reduced, and investment and employment in the energy sector are already being cut.”

To me, more interesting is the bank’s quarterly Monetary Policy Report, released at the same time, which deals with the global effects of lower oil.  It says:

1.  the Bank is assuming the oil price ultimately recovers to US$60 a barrel–no $100 oil anywhere in sight

2.  Canada gradually shifts focus to non-energy industries of the type which have been in decline during the energy boom years

3.  the net effect on world GDP growth of the oil price fall is zero, both in 2015 and 2016.  On an area by area basis, however:

–the US is a net winner.  It grows at a real rate of  +3.2% in 2015 (rather than the previously projected +2.9%) and +2.8% )+2.7%) in 2016

–China is, too.  It expands at +7.2% (+7.0%) and +7.0% (+6.9%)

–the EU, as well.  It advances at +0.9% (+0.8%) and +1.2% (+1.0%)

–Japan is up by +0.6% (+0.7%) and +1.6% (+0.8%)

–the rest of the world is a mild net loser, growing at +3.1% (+3.2%) in 2015 and reounding to +3.4% (+3.4%) the following year.

In the last category, Canada grows at +2.1% (+2.4%) this year before rebounding in mid-2015.





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