Slumping oil prices are not good news for Canada

Highlights

• The global economy is doing better than what’s depicted by the recent stock market collapse and sinking oil prices. But if left unchecked the current fears or concerns have potential to become self-fulfilling and spill over to the real economy via lower investment and consumption spending. Governments have an important role to play in restoring calm by pledging to support growth by all means necessary and by showing competence in dealing with renewed threats of a pandemic.

• In light of renewed fears about the global economy, the U.S. is once again regarded by many as a beacon of hope. The world’s largest economy is indeed on an uptrend buoyed by an invigorated private sector. Investment spending is soaring and consumers look poised to join the party, more so considering the deleveraging cycle is over. While exports could soften a bit due to the stronger dollar, that shouldn’t prevent the U.S. economy from posting growth of around 2.9% next year. In light of the decline in commodity prices, we have lowered our inflation forecasts for the U.S.

• While slumping oil prices are not good news for Canada, the overall economic outlook remains positive considering the U.S. resurgence and the stabilizing impacts of the weakening Canadian dollar. Exports should remain the driver of growth for Canada next year, and added support from investment spending can be expected, with both more than offsetting the anticipated moderation of housing and consumption. We remain comfortable with our call for growth to accelerate to 2.5% in 2015. But given its concerns about the global economy, the Bank of Canada will continue to err on the side of caution and delay rate hikes to the last quarter of 2015. Our Canadian inflation forecasts have been revised down to take into account lower commodity prices.