The Canadian economy has been powered by consumers in recent years, and it will likely need the consumer to help pull it out of recession in the year ahead, suggests Toronto-based DBRS Ltd. in a new report.
The report from the credit rating agency outlines the key risks facing the country.
At the centre of many of those risks is the impact of low oil prices on the Canadian economy. “The collapse in oil prices not only directly affects the energy sector, but indirectly affects everything from the Canadian dollar to consumer sentiment to government revenues,” the report says.
The report outlines the top 10 risks facing Canada due to low oil prices, ranging from the impact on the energy sector directly to its effect on financial firms, household debt, and the prospects for retirement. DBRS says that Canada will continue to grapple with these risks in a world of low commodity prices and growth concerns. “Oil will continue to weigh heavily on the Canadian economy in the years ahead as a persistent glut in supply keeps prices stagnant,” the report says.
In this environment, “Energy companies will need to continue focusing on cost reduction and hope for a quick end to the low price environment. Provincial governments and financial institutions will need to navigate the near-term uncertainty cautiously,” the report adds.
DBRS expects the Canadian economy to “continue its tepid trajectory with service-sector industries experiencing stable growth,” the report says. Housing prices may also continue to rise, it adds, but warns that, “Consumers will remain stretched financially and sensitive to a rise in interest rates.”
“Since the Great Recession and until recently, the Canadian economy had grown quarter over quarter, primarily because of the health of the Canadian consumer. Now that low oil has pulled the economy into negative territory, the focus is still on consumers: will they increase their spending or will low oil cause consumers to take a breather and spend less?” the report asks.
“It is DBRS’s hope that central Canada will continue to produce labour gains and increase economic output in order to propel Canada’s GDP back into positive territory. If not, it may be a long cold winter for Canada’s economy,” the report says.