Canada Hit by Sagging Oil Prices
The Canadian economy is experiencing a slump in its energy sector, one of the main drivers of its economy, with repercussions for other sectors such as manufacturing and financial services.
“Our currency is heavily tied to the price of oil and energy prices,” said Som Seif, founder and CEO of Purpose Investments, a Toronto-based investment manager with about $1 billion in AUM.
When energy prices are robust, Canada experience booms in the western part of the country, but that has a negative impact on other parts of the country like Ontario and Quebec, where manufacturing is a larger part of our economy.
“When energy prices are weak, as today, and the Canadian dollar has therefore declined, it has a negative impact on, on course, the west coast of Canada, but it has a positive impact on the manufacturing segments of the east coast of Canada,” Seif said. “This is the structural challenge that Canada faces. It’s a unique market. There are some wonderful investment opportunities for investment companies here.”
Alberta’s economy is set to slow significantly in 2015 with growth at half the rate seen last year, while weak oil and natural gas prices will curtail investment in the energy sector, according to a report by ATB Financial chief economist Todd Hirsch.
The energy sector has just started to absorb the impact of oil prices that have been cut in half, according to the report. Despite the low Canadian dollar and a reasonably narrow differential, Alberta producers are facing restricted cash flow. Capital expenditure plans have been scaled back and some degree of layoffs are inevitable.
Alberta’s economy enjoyed a solid year of growth in 2014 and continued to outperform the rest of Canada, but with oil prices and optimism sliding rapidly in the second half of the year, change is certain to come in 2015.
The ATB Financial report outlines three different scenarios for oil prices, including how the unemployment rate would be impacted, what investment looks like and other important impacts.
“Anything could happen, but we feel the most probable scenario is one that returns oil prices to a reasonable range by the end of 2015,” Hirsch said in a release. “That scenario, would put the average oil price between C$55 and C$70 per barrel.”
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