Euler Hermes: Canadian GDP to slow in 2015 due to low oil prices

MISSISSAUGA, ONTARIO – 11 MAY 2015 – Canadian GDP growth is expected to drop by 0.5 percentage points in 2015 as a result of the sharp drop in oil prices, according to Euler Hermes, the worldwide leader in trade credit insurance. Previously resilient, the country’s economy will drop from a projected 2015 GDP growth of 2.4% (with a U.S. $100/barrel assumption) to just 1.9% (U.S. $59/barrel assumption). GDP is expected to recover slightly to 2.1% in 2016.

GDP Forecast and Oil Price Assumptions
Source: IHS, Euler Hermes

“Since the Great Recession’s end 2007, the Canadian economy has proved more robust than most other developed economies, including the U.S.,” said Dan North, senior economist for Euler Hermes North America. “Canada recovered all of its lost jobs from the recession in just 27 months; it took the U.S. 75 months to accomplish this same feat.”

Depressed oil prices will also take their toll on the private sector, as insolvencies are likely to rise 4 percent, the first increase since 2001. Insolvencies dropped at an average annual rate of -8 percent between 2000-2012,slowing in 2013-2014 to about -2 percent. The level of bankruptcies reached a historic low in 2014, with Euler Hermes rating only two sectors as sensitive risks: textiles and paper.

Yearly Insolvencies in Canada
Source: IHS, Statistics Canada, Euler Hermes

Though energy comprises just 10 percent of Canada’s GDP and employment, the sector has an outsized influence on the economy:
  • As oil prices have declined more than 50 percent since June 2014, the energy trade surplus has dropped 38 percent. This has been partially offset by the non-energy trade deficit, which has improved 13 percent since October due to the Canadian dollar’s (CAD) falling value.
  • Capital investment in Western Canada, including the oil sands, will drop from $69 billion in 2014 to $46 billion in 2015. The number of newly drilled wells is forecast to drop 30 percent to 7,350 in 2015. Falling oil sector capital expenditures (CAPEX) could shave up to 0.3 points from 2015 real GDP.
  • Oil-rich provinces are likely to see localized effects, including increased unemployment, deteriorating housing markets and damage to government finances. In particular, Alberta, Newfoundland and Labrador, and Saskatchewan rely on oil and gas production royalties as a major revenue source -- which is now at risk.

At the same time, falling oil prices are expected to have some positive outcomes. Lower gas prices could boost consumer spending, as well as provide a benefit to trucking firms and airlines. Production costs will fall for chemicals manufacturers, leading to higher profits. U.S. consumers will also experience an effective disposable income increase equivalent to about +0.5 percent of GDP, providing a bump for the Canadian economy which relies on exports to the U.S.

“Companies exposed to the oil sector should closely monitor payment delays, as well as the path of oil prices,” said North. “Accounts receivables from oil producers throughout the supply chain are at a heightened risk of late payment or default. Companies selling to those businesses should consider mitigating risk by shortening payment terms, extending smaller credit lines or partnering with trade credit specialists.”