Bank of Canada warns economy’s recovery from oil shock will take more than two years

EDMONTON – Canada will require more than two years to regulate fully towards the stop by oil prices, a senior Bank of Canada official said on Wednesday, signaling no quick end to a shock which has roiled the economy.

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Deputy Governor Lynn Patterson said a simulation run by the bank suggested it might be several years prior to the economy found a brand new balance. The plunge in crude prices pushed the oil-exporting nation into a mild recession last year, prompting policymakers to chop rates of interest twice, although the bank is expected to stay on hold the following month.

“Our best guess would be that the full adjustment will require more than two years, our normal forecast horizon,” Patterson said inside a speech in Alberta, home to Canada’s struggling oil sands.

The simulation run by the bank suggests that the proportion of the commodity sector in the economy will decline, and may account for about 40 percent of exports by 2020, in contrast to about Half in 2014, Patterson said. The sector’s share of economic investment could similarly decline.

But the extent to which potential economic growth is permanently lower is determined by just how much capacity is rebuilt within the non-commodity sector, Patterson said.

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The impact of lower incomes is also gradually building and is expected to be the dominant continue the economy by 2017.
“Adjustments to large negative shocks take time,” Patterson said. “Although painful for many, the shifts are signs of a dynamic economy.”

The bank’s model suggests it requires as much as 2 yrs for that full effect of exchange rate movements to become felt, meaning the non-commodity sector will start to see more take advantage of the sharp stop by the Canadian dollar.



There are also signs that labor markets may be adapting to the economical shift more quickly than in the past, as Canadians appear more willing to move to places where tasks are, Patterson said.

On oil prices, Patterson said the stop by purchase of the sector can often mean unmet demand will put upward pressure on prices within the medium term. But she added it was highly unlikely the price peaks of mid-2014 could be seen again in the coming years.

The bank is studying whether low oil prices could spur more innovation, and its estimate of potential output is going to be updated in next month’s Monetary Policy Report, and its economic forecasts incorporating the government’s stimulus measures announced a week ago.

? Thomson Reuters 2016