Immigration Canada: Canada caught in oil price pinch, BoC warns

Canada caught in oil price pinch, BoC warns

Bank of Canada (Photo credit: Wikipedia)

BY JOHN SHMUEL, FINANCIAL POST

The Bank of Canada painted a rosier picture for the Canadian economy in its latest quarterly economic outlook on Wednesday, though it sounded the alarm on high oil prices and the ongoing high household debt of Canadians.

While the Bank said it sees an eventual reversal in the growth of household debt, its latest Monetary Policy Report noted that household debt-to-GDP ratios are expected to grow even higher, and gave no forecast for when Canadians might start paring down their debt.

The Bank of Canada also called attention to what it sees as “unfavourable” oil prices that have recently affected Canada. Despite the fact that Canada is a major oil producer, prices for Canadian crude have fallen below global oil prices, owing mainly to overcapacity of the pipelines the country uses to move its oil for export. At the same time, those higher global oil prices have conspired to hurt Canadian businesses.

“The price of oil that Canada imports has increased, while the price of oil that Canada exports has declined,” the Bank said. “The increase in the price of our oil imports raises production costs for Canadian firms and also puts upward pressure on gasoline prices, since about half of the gasoline purchased in Canada is produced using refined petroleum priced off Brent.”

Overall, however, the Bank of Canada painted a rosier outlook for the Canadian economy in 2012. As it revealed when it kept its benchmark interest rate at 1% on Tuesday, the Bank now sees Canada’s economy growing by 2.4% this year over its earlier 2.2% target.

Stronger-than-expected growth in the United States and a less severe recession in Europe are expected to prop up Canadian growth. The Bank is now forecasting U.S. gross domestic product to jump by 2.3% in 2012, rather than its earlier 2% target. It also sees the eurozone economy contracting by only 0.6% this year, an improvement from its earlier forecast of a 1% contraction.

Stronger economic growth will also bring with it a stronger loonie. The Bank said it forecasts that Canada’s dollar will remain at roughly US$1.01 this year, notably above the US98¢ it had forecasted in January.

As far as inflation is concerned, the Bank of Canada sees core inflation as hovering below 2% this year, while rising to slightly above its 2% target throughout most of 2013.

The Bank did acknowledge, however, that higher gas prices have led to higher-than-expected inflation in recent months, though it expects those prices to moderate.