With budget looming, non-oil provinces not seeing benefit of cheap energy: report

It’s no secret that the plunge in oil prices is wreaking havoc in Canada’s oil-producing provinces, but economists had expected that to be partially offset by an improvement in other parts of the economy that benefit from cheaper energy.

According to a report by the Conference Board of Canada, it isn’t playing out that way.

In a “primer” ahead of the release of the federal budget next week, the Conference Board says, in so many words, that Canada is getting the sour, but missing out on the sweet.

“You’d think (weak oil) would have a positive effect, that low gasoline prices would boost the consumer and that would have a positive effect on retail and then hopefully business investment,” says Matthew Stewart, associate director of the Conference Board’s National Forecast. “That hasn’t really happened.”

To be sure, consensus is that the overall impact of falling oil is bad for the economy, and Stewart estimates oil producing firms will cut their budgets by about one-third, which is major when you consider they make up about one-third of total business investment.

But outside of the main oil producing provinces (Alberta, Saskatchewan, and Newfoundland), the impact of cheaper energy should be economically positive.

But businesses don’t seem to be taking the hint.

“They’re unsure how the oil shock’s going to spread through the economy,” and also trying to wait out the weakness in the Canadian dollar before investing,” Stewart says.

Of course, the weak currency is also a two-edged sword, as it gives us less spending power, but also makes our products cheaper to foreign buyers. And predictably, the international trade sector has been one of the few bright spots, helped also by the strong U.S. economy.

However, Stewart says the lack of business investment outside of the energy sector means capacity is not increasing, which puts that bright spot in peril.

“There’s some risk that that is not going to be sustainable,” he says.

So how does this all factor into next week’s budget?

Well, with less oil, the government gets less revenue (The Conference Board expects Canadian growth of 1.9 percent this year, down from 2.4 percent last year), which can be problematic for a government that has set up 2015 as the year of the balanced budget.

Finance Minister Joe Oliver has already said the government will be in the black this year, so you can bet they will be, although Stewart predicts there won’t be much breathing room.

“We expect they’re right on the line right now. So they’re not in deficit, but certainly they don’t have any money to spend,” he says.

However, it’s still no small feat to balance the books in the midst of a significant economic turmoil. Stewart says the Harper government laid the groundwork for this through cost cuts over the past few years, including thousands of public sector layoffs (and the recent sale of the government’s remaining GM shares for some $3 billion doesn’t hurt).

He, like many, also expects oil to steadily push higher from its current levels over the next two years. The government is certainly hoping it does, because there are only so many cost-cutting cards to play.