The Organization for Economic Cooperation and Development reduces growth rate projection for Canada

The Organization for Economic Cooperation and Development(OECD) has cuts it growth rate prediction for Canada in both this year and also in 2016.

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In its economic assessment released today, March 18, the OECD said: “Overall, the near-term outlook remains for moderate, rather than rapid, world GDP growth. [But] real investment remains sluggish and labour is not yet fully engaged. Lower oil prices will boost global demand and have created conditions for many central banks to lower interest rates.”The Canadian central bank has already lowered interest rates in the hope of stimulating economic activity. Prior to the drastic drop in oil prices the OECD had predicted that Canada would gradually begin raising interest rates around the middle of this year. The opposite has happened, as in January, Stephen Poloz, the governor of the Bank of Canada, lowered interest rates from 1 percent to 0.75 percent.

The report claimed that overall the effect of lower oil prices should be positive:“Lower oil prices both raise the real incomes of households and reduce costs for firms, and should therefore be beneficial for global growth, notwithstanding the loss of real income for oil producers. The fall in energy prices also puts downward pressure on consumer prices. Many central banks have responded to the shock by cutting interest rates or signaled a more accommodative policy stance.”This is little comfort for provinces such as Alberta whose economy is very much dependent upon oil production and royalty revenues. Alberta's construction industry is predicted to face three years of job losses.

The OECD predicts that Canadian GDP will increase just 2.2 percent in 2015, down from a predicted 2.6 per cent gain last November. In 2016 growth is also down at 2.1 percent compared to an earlier estimate of 2.4 percent. US growth has remained the same at 3.1 percent in 2015 and 3.0 percent in 2016, outpacing Canadian growth.

The Royal Bank of Canada(RBC) earlier had also reduced its growth forecast for Canada. For 2015 RBC predicted growth in GDP as 2.4 percent down from a December forecast of 2.7 percent. However, Craig Wright, RBC chief economist said: “We see the hit to the economy from a pullback in oil and gas activity as targeted and regional, and unlikely to derail Canada’s economy this year.” The slump in oil prices wlll hurt growth prospects for oil-producing provinces such as Alberta and to a lesser extent Saskatchewan, as well as Newfoundland and Labrador. On the other hand, the lower oil prices will be positive for Ontario,, British Columbia, and Quebec, that are oil consumers. The lower Canadian dollar will also help exports along with the growth of the US economy.