While overall the Canadian economy is operating past capacity there are still a few provinces that have an opportunity to grow, mainly Saskatchewan and Alberta, according to an analyst.
“(Saskatchewan and Alberta) have not recovered from the earlier downturn and that’s in contrast to provinces such as Ontario and BC that are operating at, if not beyond capacity,” said Paul Ferley, assistant chief economist for the Royal Bank of Canada during the economic outlook for 2019 at Grain World in Winnipeg, Man. on Nov. 14.
The Canadian economy has been operating over capacity, which has led to the Bank of Canada tightening in fiscal policy in order to moderate growth and control inflation. The Bank of Canada has been doing this by raising interest rates.
When you look at the Canadian economy on a national level not all provinces are operating at the same economic level. According to Ferley, provinces like Ontario and British Columbia have been operating at or above capacity, which has driven up the rate nationally. While oil producing provinces, like Saskatchewan and Alberta, still haven’t fully recovered from the drop in oil prices a few years ago.
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“They have some more capacity to grow. But the national numbers and that’s reflecting additions in the larger provinces like Ontario and BC are at, if not beyond capacity. Fortunately in terms of setting interest rates the Bank of Canada will do it on the basis of the national indicators,” Ferley said.
On a regional basis, Ferley said, economies in provinces like Quebec, Ontario and B.C. should be able to hold steady as long as the Canadian dollar stays low in order to stimulate trade. Saskatchewan and Alberta should be expected to lead growth on a provincial level.
“So as a result we lean towards some of the oil producing provinces taking the lead over the next couple of years in terms of growth,” Ferley said.
The Royal Bank of Canada is assuming Canadian crude prices will start to correct closer to their American counterparts. Ferley said that RBC is assuming Western Canadian Select will be worth C$58 per barrel by 2019, more than doubling its current value.
“We’re of the view that a lot of the recent widening is because of temporary refineries shut downs in the U.S. as those come back on stream that spread should narrow and return…there is concern about pipeline capacity and that will sort of maintain a discount relative to global oil prices,” Ferley said.
The Canadian economy could be affected by the United States economy though, which is operating beyond capacity. According to Ferley, the U.S. has been boosting its economy by tightening monetary policy and stimulative fiscal policy.
“I think it’s actually an error. Usually at this stage in the fiscal cycle you don’t offer fiscal stimulus, the Trump administration for various political reasons have opted for that course of action,” he said, adding that this will result in the U.S. Federal Reserve countering this with even more aggressive fiscal tightening.
If this does lead to problems in the U.S. economy it could spill over into the Canadian economy, even though the Canadian economy has been operating past capacity and is starting to moderate, Ferley said.