Canada’s external factors key to economic rebalancing and growth

Factors beyond Canada's borders remain central to the economic outlook. Low oil prices, diverging growth outlooks and expected interest rate differentials have all pushed the value of the Canadian dollar lower relative to its U.S. counterpart. The result has been improved competitiveness of Canadian goods, and a pick-up in export activity that is expected to persist through 2016, weakness in the more recent monthly data notwithstanding. 

A note of caution is warranted: although exports are expected to be a key driver of growth, the pace of their expansion is likely to be less than what the level of the loonie and U.S. demand might imply. There are two main reasons for this: first, other nations have also seen their currencies fall against the greenback, and so have similarly gained competitiveness in the U.S. market. Secondly, exports have become less responsive to the exchange rate, and more sensitive to foreign demand. These factors will serve to restrain export growth relative to past cycles. 

Low oil prices tend to benefit some sectors of the economy, such as exports, as foreign incomes (and hence demand) rise and the loonie falls. In contrast, low prices have a significant negative impact on business investment. The benchmark West Texas Intermediate (WTI) oil price has fallen markedly, and is expected to recovery only gradually to just $60 per barrel by the end of 2017. 

The continued weakness in WTI is expected to translate into further sharp reductions in oil-related capital spending, with total investment in non-residential structures unlikely to bottom-out until 2016Q2. The continuation of the low oil price environment also means that the investment recovery, when it does occur, is likely to be at a fairly gradual pace rather than the familiar "V-shaped" bounce back of past cycles.