OTTAWA — The Bank of Canada says low oil and commodity prices are putting the Canadian economy’s post-recession recovery at risk.
The central bank’s deputy governor Timothy Lane told an American audience Tuesday that if cheap crude prices persist, they will significantly discourage investment in the oil sector, which he said accounts for about three per cent of Canada’s gross domestic product.
In prepared remarks of his speech in Wisconsin, Lane said lower oil prices produce benefits such as putting more disposable cash in consumers’ pockets and helping to cut costs for other sectors, like manufacturing.
But, Lane predicts the gains will be more than outweighed by the losses because lower incomes in the oil patch and along its supply chain will hurt the rest of Canada’s economy.
“Despite the mitigating factors I enumerated, lower oil prices are likely, on the whole, to be bad for Canada,” Lane said.
His remarks follow Bank of Canada governor Stephen Poloz’s statement last month that low oil prices could knock 0.3 percentage points off the pace of economic growth.
In his fall update, Finance Minister Joe Oliver warned cheaper crude could drain $500 million from Ottawa’s bank account in 2014 and $2.5 billion per year between 2015 to 2019.
Since the estimates by Poloz and Oliver, the price of a barrel of oil has tumbled even further.
TD Bank issued a report Tuesday that predicted sliding oil prices could turn the federal government’s promised 2015-16 surplus into a deficit. It projected Ottawa to run a $2.3-billion shortfall next fiscal year rather than the $1.6-billion surplus predicted by the government in November.
TD also said the government’s $4.3-billion surplus projection for 2016-17 is on track to become a $600-million deficit unless new revenue-generating or cost-cutting measures are introduced.
However, the deficit estimates are smaller than the government’s $3-billion reserve set aside for contingencies — which would help keep Ottawa in surplus territory.
Lane’s gloomy outlook adds fuel to speculation the Bank of Canada will hold off before hiking the country’s trend-setting interest rate, which has been locked-in at one per cent for more than four years.
The deputy governor also said the central bank will closely monitor the immediate yet temporary negative impact on total inflation, as well as its broader effects on growth and how it could delay Canada’s return to its full economic health.
“We will continue to work to bring the Canadian economy back to its potential and return inflation sustainably to our two per cent target,” Lane said.
“However things play out, we have the tools to respond.”
Lane said the bank will issue its complete forecast on the impact of low oil prices on the Canadian and global economies when it releases its monetary policy report next week.