Roiled by oil

Last spring, Canadian economic growth was being boosted by Alberta’s oil industry. The price of a barrel of oil now is roughly half what it was back then. The recent price drop promises to tilt economic growth in favour of other industrial sectors.

News stories quote economists and oil sector analysts who predict oil prices are close to bottoming out and will start rebounding in the second half of 2015. Others aren’t so sure. In truth, nobody really knows how low prices will go and how long they’ll take to rally above $90 (where they were from July 2012 to October 2014).

Lower oil prices and uncertainty about their outlook have the potential to affect a number of economic indicators. Sometimes the effect is good, sometimes it’s bad, and sometimes it cuts both ways at the same time.

  1. Economic growth: Oil companies are planning on lower investment in Canada’s oil patch this year, which is bad news for Canadian economic growth. But lower gasoline prices are good news for U.S. consumers, which is good news for Canadian exports of manufactured goods, like cars, and that’s more good news for Canadian economic growth. On balance, the Bank of Canada expects lower oil prices to translate into slower Canadian economic growth this year.
  2. Inflation: Lower prices at the gas pump mean lower inflation. That’s good news for consumers. That said, lower inflation will weigh on wage growth, which is already subdued. That’s good news for employers but bad news for employees.
  3. Interest rates: Lower inflation means the Bank of Canada will be in no hurry to raise its trend-setting overnight lending rate. That’s good news for anybody applying for or who has a variable rate mortgage.
  4. Consumer confidence: Cheap fill-ups are good news for consumer confidence. However, lower oil prices will subdue job growth in provinces where its economy is tied to the oil patch, which – in turn – is bad news for consumer confidence.

Whether oil prices go lower, stay low before rebounding, and/or take longer to rebound than is currently anticipated, one thing is certain: uncertainty about oil prices will likely weigh more on provincial economies that were benefitting from a strong energy sector. Even so, lower oil prices are expected to gear-down economic growth in these provinces – not throw it into reverse. That’s good news for home buyers in sellers markets that are poised to become more balanced. However, it’s bad news for home buyers expecting a substantial and lasting correction in home prices, particularly for homes whose price is already within reach for many buyers.

As CREA’s former Chief Economist, Gregory Klump provided his views on the state of and outlook for Canadian housing markets to news media, policy makers, and real estate industry stakeholders. In 2017, Gregory celebrated his 25th anniversary as a member of the team at CREA. He’s an avid skier and snowboarder during the winter and a year-round Crossfit enthusiast.

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