Global commodity slump could hit parts of Canada hard

Petro-provinces like Alberta, Saskatchewan and Newfoundland will be especially hard hit as oil prices keep sliding amid fears about China’s economy.

Thestar.com
Aug. 24, 2015
By Ian Bickis

Global commodity prices are tanking and they’re bringing Canadian markets down with them, though experts say certain provinces are going to feel the pinch more than others.

“It’ll feel like a recession, depending on where you live in the country,” said John Stephenson, chief executive of Toronto hedge fund Stephenson & Co. Capital Management.

He said everything from oil to metals to lean hog prices are dropping as weaker growth globally weighs on demand - a downward trend that took its toll on the world’s stock markets Monday.

“Virtually everything is down in price - and significantly down, not just a little bit,” said Stephenson.

Petroleum is a good example. Canada’s energy producers, already hurt by the Saudi decision last fall not to cut production, which precipitated the slump in oil, were hit again Monday when the benchmark price for North American oil dropped to a fresh six-year low, closing at $38.24 (U.S.) a barrel. (By comparison the benchmark was $105 a barrel in June, 2014.)

Petro-powered provinces like Alberta, Saskatchewan and Newfoundland and Labrador will be especially hard hit, while the manufacturing heartland of Ontario and Quebec could get a boost from the lower Canadian dollar, says Robert Kavcic, senior economist at BMO Capital Markets.

At today’s prices, many Canadian oil producers are losing money on every barrel they extract from the ground, said Kavcic.

“It’s getting to be a lot tougher in the energy sector now. You could actually start to see some production scaled back.”

The latest drop in oil prices has Todd Hirsch, chief economist for ATB Financial, a provincial Crown agency based in Edmonton, predicting a mild recession for Alberta this year and a sluggish recovery next year. As recently as June, he had forecast the province would avoid such an economic decline.

“Since that time the situation has changed pretty dramatically,” he said.

Hirsch said the fall in oil prices earlier in the year was just an oversupply issue, but now crude is also being hit with a potential drop in demand as China’s economic boom starts to show cracks.

Stephenson said commodities will drop further as investors realize how slow the Chinese economy is actually growing. He estimates the country is growing at 3 per cent, compared with Beijing’s official figure of 7 per cent.

“Its weakness is really problematic to the global markets,” said Stephenson.

Kavcic does see some brightness in the picture. While China’s economy is wavering, the U.S. economy is showing continued strength, with good consumer spending and an uptick in residential construction.

He said the strong U.S. housing market has increased demand for our lumber, one of the few Canadian commodities doing relatively well.

U.S. strength has also helped our manufacturing sector, which he said is improving despite the drop in spending by the energy industry. Manufacturing is getting a boost from the low Canadian dollar, which closed down at 75.40 cents (U.S) on Monday.

“When you consider the Canadian dollar, plus U.S. demand combination, plus the benefit of lower energy costs though the manufacturing production chain, you probably end up getting a net positive,” Kavcic said.

Kavcic said BMO expects to see 2-per-cent growth for Canada’s economy as a whole in the second half of the year and through 2016 as the dramatic spending cuts in the energy sector start to level off and other sectors improve.

“The better outlook in Ontario and Quebec and the export sector, and still decent consumer spending and housing environment should be enough to keep us out of a full-scale prolonged recession.”