Canada fighting economic war on multiple fronts

Executive Summary

• The Canadian economy is facing a challenging economic environment as it has been hit with a one-two punch from the outbreak of the coronavirus and the plunge in oil prices. The ongoing oil price war between Saudi Arabia and Russia exacerbated an already existing over supply of oil, pushing Western Canadian oil prices to their lowest level on record. Meanwhile the economic effects of the coronavirus pandemic have created another shock to the Canadian economy.
• The Bank of Canada (BoC) slashed its policy interest rate a cumulative 150 bps during March, bringing the rate to 0.25%, and undertook a range of non-interest rate actions aimed at improving the functioning of markets or providing liquidity. Despite these efforts, we still believe the economy faces significant downward pressure and believe the risks are tilted toward further BoC easing.
• Given the current environment, we have significantly downgraded our forecast for the Canadian economy. We now expect a 3.6% contraction for the full-year 2020. In addition, we maintain a subdued outlook for the Canadian dollar, and see the risks as tilted towards further weakness.

Outlook for Canadian Economy Darkens

The outlook has darkened for the Canadian economy given combination of the coronavirus outbreak and sharply lower oil prices. Oil prices have dropped significantly after Saudi Arabia and Russia failed to reach an agreement on oil production limits earlier this year, as well as a slump in global oil demand. As the world’s fifth largest oil producer, the plunge in oil prices will likely have a significant influence on Canada’s economy. The Western Canada Select grade oil price is now trading around just US$5.00 a barrel, the lowest price since at least 2008. As a result, oil companies are reducing their capital spending plans, while some have also signaled new layoffs are coming as the oil industry tries to stave off the dual threat.

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