Commodities_Oil_Worker

Falling oil prices and a now-weaker Canadian dollar have turned the tables on the outlook for provincial economies, finds a report from CIBC World Markets.

“A dramatic drop in oil prices, juxtaposed against a still-healthy U.S. economy, has turned the tables on relative provincial growth, with Alberta at risk of a recession but central Canada’s prospects brightening,” says Avery Shenfeld, chief economist, CIBC World Markets. “We forecast Alberta to post the biggest budgetary shortfall, but it still remains the best positioned to weather the storm.”

Read: U.S. to grow 3.1% in 2015

Alberta appears headed for a mild and short-lived recession, with at least two quarters of negative growth. Real GDP in Alberta is forecast to contract by 0.3% in 2015, before recovering to 2.3% growth in 2016, the report says. Economic growth in 2014 is forecast at 4.1%. The unemployment rate in Alberta is expected to climb to 6.8%, from 4.8% in 2014. Housing starts are forecast to decrease from 40,600 units in 2014, to 28,000 in 2015, and 34,000 in 2016.

The hit to Alberta’s GDP growth will be less about producing fewer barrels and more about the squeeze on capital spending in the energy sector, the report says.

Read: Does Norway hold the answer to Canada’s oil-price woes?

“There are some offsets, as the province’s non-energy exporters will be helped by the weaker currency and its domestic spending will be supported by interest rate cuts,” says Shenfeld, who forecasts oil prices to recover in the medium term. “Furthermore, Alberta can withstand the economic weakness given its strong fiscal position.”

And even if Alberta ran a $5-billion deficit year after year and its economy grew at a nominal rate of 1% after 2016, it would take five decades for Alberta to reach the same debt/GDP ratio that Ontario planned for last year, the report says.

In central Canada, both Ontario and Quebec are poised to do better, thanks to strengthening U.S. demand and the additional lift that exports will garner from a weaker Canadian dollar. For example, a 1% acceleration in U.S. growth typically adds about 1.2 percentage points to Ontario’s real GDP.

Read: Don’t avoid the energy sector

Shenfeld forecasts nominal GDP for both provinces to run about a half point above their original projections. “Both of these central Canadian provinces are budgeting for virtually no spending growth in an effort to contain borrowing needs, a tough bar to meet,” he says. “The additional revenue might therefore give a bit of spending elbow room that will make the 2015 to 2016 deficit targets easier to attain.”

Ontario’s economy is forecast to grow from 2.1% in 2014 to 2.8% this year and next, with the jobless rate declining steadily to 6.6% in 2015, and 6.4% in 2016. The unemployment rate in Ontario last year averaged 7.2%.

Quebec real GDP growth is forecast to grow to 2.4% this year, and 2.6% in 2016, up from an estimated 1.8% in 2014. The jobless rate is expected to decline from 7.8% last year to 7.2% in 2015, and 6.7% in 2016.

Originally published on Advisor.ca

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