Ottawa – Plummeting oil prices are having a significant negative impact on the Canadian economy. Ahead of the federal budget on April 21, a new Conference Board of Canada report provides highlights of the current state of the economy and presents the forecast for the national economy.
According to the Canadian Outlook: Spring 2015, weak business investment combined with easing consumer spending and heavy fiscal restraint will limit Canada’s economic growth to an underwhelming 1.9% in 2015, compared to a more average 2.4% last year.
“Business investment will be the weakest part of the economy this year, held back by large cutbacks in the energy sector. Overall, we expect oil and gas firms to cut their budgets by almost one-third over the next two years,” said Matthew Stewart, associate director, National Forecast. “Given that the energy sector currently represents almost one-third of total business investment, this will have a sizable impact on the overall economy.”
As the federal government prepares to table its budget, the outlook describes how it is well positioned to deal with the repercussions of lower oil prices. After years of cuts, government expenditures have fallen significantly and, as a result, the federal government is expected to remain in the black despite the weaker revenue outlook. The Conference Board’s forecast has the federal government on track to post a small surplus for fiscal year 2014-15.
While the federal outlook remains positive, many provincial governments continue to face budgetary challenges. Even when oil prices were high, most provinces were planning for significant fiscal restraint in order to balance their books. Now with oil prices taking a bite out of revenue growth, an even greater level of restraint is expected. With weak tax revenues and lower royalties, the combined provincial deficit has already risen to an estimated $20 billion in fiscal year 2014-15, up from $13.7 billion the previous year.
The decline in oil prices is also affecting the outlook for employment. Following a poor performance in 2014, which saw the weakest increase in jobs since 2009, Canada is forecast to add just 172,000 jobs this year. The unemployment rate will consequently rise slightly over 2015, reaching 6.8% in the fourth quarter, before drifting back to 6.5% by the end of next year.
Despite significant savings at the pump, household spending is also expected to ease this year. Modest employment growth, weak wage gains, high levels of household debt, easing real estate markets, and the threat of job losses in oil-rich provinces, will all combine to take some of the steam out of consumer spending in 2015. After increasing by an estimated 2.8% in 2014, consumer spending is forecast to rise 2.5% this year.