Oil's Price Drop Hurting Canada

Several of Canada’s central bankers have publicly stated that oil’s price drop will negatively impact their economy.  Deputy Governor Timothy Lane was the first to do so.  In a speech on January 13, he concluded that, “… lower oil prices are likely, on the whole, to be bad for Canada.”  Bank of Canada Central Governor Poloz echoed this sentiment in a March 30 Financial Times interview, calling the net effect of oil's price drop on Canada’s economy “atrocious.”  Recently issued economic indicators confirm these predictions.

     In the last two readings, the Markit Economics Canadian Manufacturing number has shown a contraction.  Although the April 1^st headline number of 48.9 was slightly better than March’s 48.7, the reason for the decline were drops in output, new orders and employment.  Survey respondents primarily blamed weakness on the energy sector.  The Ivey PMI confirms this drop, showing a contraction in the last three readings:

Neither indicator implies a sharp recession is coming.  Instead, they strongly hint at several quarters of growth around 0%.

     Confirming a period of upcoming weakness are survey answers contained in the latest Bank of Canada Business Outlook report.  The number of respondents who see an increase in sales over the next 12 months has declined sharply in the last two readings.      

This is leading to a decline in the number of businesses that will increase capital spending:

Capital spending weakness will lower the Markit and Ivey numbers discussed above.

     The economic numbers are still too fresh to make predictions of imminent recession.  But the beginnings of negative ripple effects are clearly present.  

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer