OECD lowers growth outlook for Canadian economy

The Organization for Economic Co-operation and Development (OECD) has predicted a lower growth rate in Canada. From a 2 percent growth rate predicted earlier, the OECD now predicts a rate of only 1.4 percent.

While the decline was the steepest of any in the countries looked at, it was still a better performance than that of France or even Germany. The OECD warned of significant risks to financial stability that extended across borders. It also pushed politicians to remove the burden of producing stimulus from central banks. While Canada's growth is behind that of the U.S. at 2 percent and the UK at 2.1 percent, it is still better than Italy or Japan, or as mentioned, France and Germany. The U.S. and Germany suffered downgrades of one half percentage point each. In 2017 Germany is now expected to grow by 1.7 percent and the US 2.2 percent in 2017. Canada's growth rate in 2015 was just 1.2 percent, so 2016 is still predicted to be slightly better. The CIBC had predicted Canada's growth at 1.3 percent this year close to the OECD estimate.

The Paris-based OECD also cut the rate of global growth from 3.3 percent to 3.0 percent. This will make global growth this year no better than last, which was the slowest in five years. The OECD urged leaders to use all the levers at hand to stimulate economic growth. The group noted that using monetary policy alone as the sole tool for stimulus did not work well: "Monetary policy cannot work alone. A stronger collective policy response is needed to strengthen demand." The group suggested exactly what the Canadian government plans, more investment in infrastucture projects.

The outlook for China's growth was unchanged at 6.5 percent in 2016 and 6.2 percent in 2017. Among emerging economies, Brazil was doing very poorly, with the economy shrinking by 4 percent this year. One bright spot was India where the outlook was raised from 7.3 to 7.4 this year. However, for next year the growth rate was lowered slightly from 7.4 to 7.3, still greater than Chinese growth.

The OECD singled out Canada and other economies reliant upon commodity exports as showing the worst effects from the global economic slowdown that appears to be underway. Catherine Mann,, the OECD chief economist said: "Trade and investment are weak. Sluggish demand is leading to low inflation and inadequate wage and employment growth." Global trade and investment is also weak according to the OECD report.

The low prices of oil and other commodities have hurt the Canadian economy in recent months. Ottawa has responded to the downturn by promising considerable expenditures of new infrastructure projects, a move that will lead to a considerable deficit. Nevertheless, deficit spending is recommended by the OECD and many economists as a way to stimulate the economy. The Bank of Canada forecast is also for 1.4 percent Canadian growth this year but is slightly more optimistic than the OECD with a 2.4 estimate for growth next year.

Canadian stock market indices and loonie both take a dive

Stock markets declined around the globe on concerns about China and slumping oil prices. At close Friday, the Dow Jones dropped 390.97 points, the S&P 500 fell 41.55 and the Nasdaq slid 126.58 points.

The Toronto Stock Exchange S&P/TSX dropped 263 points or a full 2.13 percent to 12,073.46. This is the TSX's lowest level since June 2013. Over the week, the drop will be over 3 percent. The TSX decline was partly due to the sustained drop in oil prices, which made conditions worse for Canada's already depressed energy sector. The price of crude dropped below the crucial $30 level. Canadian oil sands oil, Western Canada Select(WCS) is at its lowest level ever at just under $17 per barrel.

As often happens, the Canadian dollar, the loonie, dropped in tandem with the price of oil. The loonie dropped below 70 cents, to 68.8 cents, its lowest level since 2003. While this may help some exporters, it will increase Canadian prices for imported fruit and vegetables and other items from the United States, as the U.S. dollar remains strong. There is speculation the Bank of Canada may again reduce interest rates to stimulate the economy.

As well as energy stocks, financials also moved the TSX lower. RBC fell 2..7 percent on the day to $67.70. Overall, the energy stocks lost 4.7 percent, while the financials declined by 2.3 percent. One minor bright spot in the resource sector is Vitality Air of Edmonton which is exporting fresh air from near Banff to China. You can apparently get about 100 hits from a bottle that costs between $10 and $20.

According to BNN, an empty oil barrel costs about U.S. $78.39 on Amazon. If producers have any spare empty barrels they can help their dismal cash flow situation by selling them off rather than filling them with $17 dollar a barrel oil from the Oil Sands. To make some return from their use of the barrels, oil producers would be better off selling them filled with fresh water at a value of about $66.55 US for a 55 gallon barrel. Even better, they could fill it with fresh air from Banff and ship it to China.

Markets also declined in Europe and the Shanghai Composite wiped out recent gains. Gold prices surged the most in six weeks. Yields on 10-year U.S. Treasury notes dipped below 2 percent as investors sought safe havens and doubts grow that the Federal Reserve will raise interest rates.

iness/business/canadian-and-global-stock-markets-in-a-steep-decline/article/454915#ixzz3xegXqnJE

2015 was a dismal year for oil prices, the loonie, and Canadian stock markets

On the final trading day of the 2015 on Thursday, the S&P/TSX composite in Toronto was at 13,009, a loss of 132 on the day and off 11 percent from a year ago. This is the worst performance since 2011.

The TSX peaked on April 15 at 15,524 but since then has dropped 16 percent. The Canadian economy has struggled with output flat or even down some months. In the U.S. stock markets performed better than in Canada but turned in a mixed performance. The Dow Jones dropped 2.2 percent over the year, and the S&P 500 less than one percent. The Nasdaq actually gained 5.7 percent.

Oil has suffered an even more dramatic decline in price. A barrel of West Texas intermediate dropped by 38.6 percent during 2015. This is the worst performance since the financial crisis back in 2009. At the close, the price was up marginally at $37.05. For some producers, oil prices are already below the "marginal cost of supply." With producing giants such as Saudi Arabia refusing to cut back production, higher-cost producers will cease expanding production and in some cases even stop production. The situation is ripe for takeovers by larger companies with cash to buy companies struggling to survive and starved for cash. While no one knows how low oil prices could go, Goldman Sachs made headlines by suggesting last week that WTI could go as low as $20 a barrel. Many analysts see this as an overly pessimistic estimate and see the price as close to a bottom now with demand beginning to increase. A year and a half ago oil was priced at over a $100 a barrel. Oil and gas revenue for 2015 was expected to be about $91 billion about 40 percent below 2014.

In May of 2015 oil surplus hit two million barrels each day. In August oil storage reached a level not seen in 80 years. The Canadian Association of Petroleum Producers(CAPP) reported that there had been layoffs of 35,000 in Alberta.

Suncor CEO Steve Williams said:"There is not a sudden moment when we realized prices were going to be lower for longer. There is consensus now that prices are going to be low and for much longer than people anticipated."Some auction houses in Alberta are seeing their business boom as companies sell off equipment to keep cash flowing.

Scotiabank Economics has lowered its price forecast for oil prices next year after the recent OPEC meeting that failed to announce any production cut. The prediction is for WTI to be from $40 to $45 a barrel for 2016 and only $45 to $50 for 2017. Scotiabank said that in the short term WTI could fall as low as $30 dollars a barrel. Common forecasts put the price as flat until rising demand and falling output will raise prices. A long term forecast by the International Energy Agency puts the price of oil back at about $80 a barrel by 2020.

The loonie dives in tandem with oil prices as it dropped 16 percent relative to the US dollar over the year. This is close to the 18.6 percent the loonie lost during 2008. On Thursday the loonie was trading at 72.34 cents on the U.S. dollar. While the lower loonie may help some of our export businesses especially to US markets, it has resulted in higher prices for goods imported from the US such as fresh fruit and vegetables. Canadian tourists and snowbirds will find it will cost them more Canadian dollars on their journeys.

One area where prices are on the rise is in the housing market, especially "hot" areas such as Vancouver and Toronto. Also rising are Canadian household debt levels. As interest rates remain low, Canadians are often enticed into buying while they are still able to afford monthly payments. It is quite possible that 2016 could see a property value crash, especially in overheated markets. In areas hit by low oil prices some realtors are already closing up shop.

In 2016, the Canadian Real Estate Association forecast home prices to increase by 1.4 percent compared to the 7 percent in 2015. However, larger price increases are expected to continue in areas such as Vancouver and Toronto. One factor is that the low loonie makes these properties attractive to foreign buyers. Job growth has been relatively strong in these cities and demand for housing increases as workers migrate away from provinces such as Alberta. The inflow of immigrants will also increase demand.

Low interest rates may entice more Canadians to take on more debt, even though the ratio of household debt to income is now 164 percent compared to about 100 percent in the late 1990s. Over the past year household debt in Canada rose to $1.88 trillion. Mortgage debt rose by $74.7 billion or 5.9 percent. If jobs are lost or interest rates increase many households will find it impossible to cope with their debt loads. The enclosed video is from March of this year.

International Monetary Fund reduces Canada GDP growth rate projection

The International Monetary Fund(IMF) has slightly reduced its forecast for Canadian economic growth both for this year and next. Reduction in oil prices is partly responsible for the reduction in the growth outlook.

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The IMF's, World Economic Outlook, predicts that Canadian GDP will grow by 2.2 per cent this year and only 2.0 per cent in 2016. These predictions are both down 0.1 per cent from the last projection in January of this year. The US economy will do better than Canada, and is predicted to grow by 3.1 per cent both this year and next. Lower oil prices in the US will help spur consumer demand there. The US growth rate will still be below the global average estimated at 3.5 per cent for this year.

In spite of the slight decline, the IMF still describes Canadian growth as solid and reinforced by a relatively stronger US economy and the decline of the Canadian dollar which will help exports. The report said:“These developments have led to a welcome pickup in exports, but have yet to translate into strong investment and hiring. But risks are tilted to the downside, because the unusually large fall in oil prices could further weaken business investment in the energy sector and lower employment growth.”The lower oil prices will lower investment and employment significantly in areas such as Alberta where the energy sector is a key part of the economy. While the lower oil prices might have a net negative effect on Canada, the IMF estimates that if the lower prices were passed through to consumers globally there would be a net jump in global growth of about one per cent.

The IMF also suggested that the Canadian government pursue "targeted macroprudential policies that would address high housing sector vulnerabilities". The IMF is concerned that low mortgage rates will encourage borrowing and send house prices soaring, resulting in a possible real estate price bubble. If interest rates rose or there was a slump in employment many borrowers might not be able to make mortgage payments. The government has already taken some steps to make qualification for mortgages a bit stronger. Other policies to dampen demand may be required. House prices are still rising in Canada although mostly in some key markets such as Toronto and Vancouver. Cities in Alberta such as Edmonton and Calgary could see price declines as the energy industry cuts back due to the low price of oil. Some statistics on recent home prices can be found in this article.

Read more: http://www.digitaljournal.com/business/business/imf-slightly-reduces-growth-outlook-for-canada-this-year-and-next/article/430740#ixzz3XUZxqMfX

Bank of Canada surprises markets with rate drop

In a surprise move, Canada's central bank, the Bank of Canada, reduced the overnight lending rate by a quarter of a percentage point. The reason given was the threat to the economy of plunging oil prices.

The move by the Bank reduced the lending rate from 1.0 percent to 0.75 percent. The Bank governor Stephen Poloz said: "The drop in oil prices is unambiguously negative for the Canadian economy. Canada's income from oil exports will be reduced, and investment and employment in the energy sector are already being cut." While the overall effect of the drop in oil prices may be negative, the impact will vary from province to province. With its huge oil resources, Alberta will suffer a significant drop in income from royalties and a decline in economic activity in the oil patch, but other provinces with industries that use oil welcome the lower prices for inputs. Consumers, airlines, truckers, and cabbies will be cheering the downward trend in fuel prices.

 The Toronto Stock Market (TSX) was up almost 300 points not long after the announcement. No doubt the reduced rate will be expected to boost consumer demand and help raise the level of economic activity. Almost no economists had been predicting the rate cut at this time but more were suggesting it could happen in the future. 

The rate decrease, follows upon a recent downgrading of both global growth and Canadian growth in the World Economic Outlook for 2015 published by the IMF. The forecast reduced global growth rates by 0.3 percent to 3.5 percent in 2015 and 3.7 percent in 2016. Canada's growth was downgraded 0.1 percent to 2.3 percent for 2015 and even more 0.3 percent for 2016 to just 2.1 percent. The drop in oil prices by about 50 percent since September 2014 was cited as the main reason for the IMF downgrade. In June of last year oil was at $105 US a barrel but now is well below $50 a barrel. The Bank of Canada also downgraded its prediction for Canada's growth in 2015 from 2.4 percent to 2.1 percent even lower than the IMF prediction, although contrary to the IMF, it sees a rise to 2.4 percent in 2016. 

The Bank made its projection on the assumption that oil prices will average about $60 dollars a barrel over the next two years. Derek Burleton, an economist at TD Bank said: "It is a significant move. It does show the Bank of Canada is worried about the big drop in the price of oil ... and what kind of uncertainty that poses in the next few quarters. I don't think they are panicking but I do think they're concerned about some of the uncertainty the recent slump in the price of oil does create for the economy." BMO economist, Michael Gregory, said: "Today’s BoC rate cut smacks of being a one-time 'insurance' move but in his presser, Governor Poloz indicated that if the world changes again (adversely for Canada) the Bank could take out more insurance."  

The Bank predicts that the lower oil and energy prices will reduce inflation at least temporarily but over the projected two year period will again approach the target two percent level. The Canadian dollar, the loonie, is trending much lower. BNN reports: Charles St-Arnaud, senior economist at Nomura Securities International Inc., said the drop in crude will prompt the central bank to lower its growth forecast by 0.5 percent.The loonie depreciated 1.4 percent to $82.55 cents US in Toronto Tuesday, at one point touching its weakest level since April 2009. Nomura forecasts it will reach 80 cents US by the middle of the year. The lower loonie will help Canadian exporters but imports from the US will rise in price and the flow of shoppers across the border may slow considerably as the loonie declines in value against the US dollar.

Canadian oil companies suffer from glut of oil in U.S. storage.

While gas at the pumps is going up, there is also a glut of oil as more and more goes into storage at Cushing Oklahoma. The result is that the gap between the price received for Canadian produced oil and European Brent priced oil is increasing.

Senior oil analyst Roger McKnight notes::"Canadian oil sands are getting about a $30 US a barrel discount to West Texas Intermediate (WTI). Brent crude buyers are paying WTI plus about $15 a barrel," "The reason for that spread is there is nowhere for the stuff to go because of the bottleneck at Cushing, Oklahoma which is the trading end point." This explains why there is such a rush to complete a pipeline from Cushing to Texas and the Gulf Coast.

Inventories are accumulating at this storage point. The situation is exacerbated as production is increasing in Montana, North Dakota, and Saskatchewan. McKnight claims the glut will become worse. This may be bad news for the oil companies but it is at least possible the glut might drive the price of oil down. However, I would not count on it! For more see this BNN article.

Potential Iran-Israel conflict sends oil prices up.

This is from the CBC.
The U.S. dollar decline fuels oil price increases. No doubt there is a lot of money going into oil as a hedge. There is lots of talk about curbing speculation but this article claims the basic cause of oil price increases is that demand is still high while production is not increasing to meet it. I really can't see how officials in the U.S. can do anything about speculation. There is probably even more speculation in food commodities.
Perhaps some people know more about U.S. and Israeli plans for attacking Iran than the rest of us given the supposed effect of this conflict on oil prices.



Potential Iran-Israel conflict sends oil prices up
Last Updated: Tuesday, July 1, 2008 9:06 AM ET
The Associated Press
Oil prices climbed above $142 US a barrel Tuesday amid concerns about a potential conflict between Iran and Israel and a weakening U.S. dollar.
Also on Tuesday, the International Energy Agency downsized its estimate of how much oil will reach the market. The agency said supply and demand figures will be close through the next five years, despite lower overall estimated hunger for crude as the world adjusts to record prices and cuts its consumption.
By midday in Europe, light, sweet crude for August delivery was up $2.04 US to $142.04 US a barrel in electronic trading on the New York Mercantile Exchange.
On Monday, the contract soared to a record $143.67 US a barrel. It later fell back to close at $140 US on reports of weakening U.S. oil demand and end-of-the-quarter profit-taking by traders.
In London, Brent crude futures rose $2.41 US to $142.24 US on the ICE Futures exchange.
"You have supply-side concerns, such as the rhetoric on Iran, that will likely keep a floor under prices," said Victor Shum, an analyst with Purvin & Gertz in Singapore. "I don't see much resistance to $150 [US], which could happen in the coming weeks."
In its Medium-Term Oil Market Report on Tuesday, the IEA said demand would rise most in developing countries, with Asia, the Middle East and Latin America accounting for nearly 90 per cent of demand growth over the next five years.
The energy agency's executive director, Nobuo Tanaka, said market fundamentals, and not speculative investments, were behind high oil prices.
'Working at full throttle'
"OPEC production is at record highs and non-OPEC producers are working at full throttle, but stocks show no unusual build," Tanaka said at the presentation of the IEA report in Madrid. "These factors demonstrate that it is mainly fundamentals pushing up the price."
Oil also rose on expectations the European Central Bank will likely raise interest rates at its next meeting on Thursday, which would help strengthen the euro against the dollar, Shum said.
As the dollar has weakened, investors have been piling into oil contracts, betting that they will gain, thereby offsetting the dollar's decline. Since the start of the year, crude has shot up nearly 50 per cent.
Traders were still anxious about tension in the Mideast after the commander of Iran's Revolutionary Guards warned that if his country is attacked, Tehran would strike back by barraging Israel with missiles and that it would control a key oil route in the Gulf.
Those comments, reported Saturday in Iran's conservative Jam-e-Jam newspaper, came after Israeli military exercise over the Mediterranean Sea that was seen as sending a message to Iran to curb its nuclear ambitions.
Iran is the world's fourth-largest oil exporter and OPEC's second-largest exporter. About 40 per cent of world oil exports pass through the Gulf.
Traders were also digesting news from the Energy Information Administration, which reported Monday that U.S. oil usage in April was lower than previously estimated, falling by 4.2 per cent to 19.768 million barrels per day from 20.631 million. That was 3.9 per cent lower than in April 2007 and the lowest level for the month in six years.
"We're starting to see demand destruction in the U.S., but in China and other developing countries, we still see demand growth," Shum said. "It could take several months before recent fuel price rises in developing countries start to slow oil demand in those places."
© The Canadian Press, 2008