Forecast 2015: Adjusting to the New Normal

Consumers and manufacturers should use the temporary windfall of lower energy costs to pay down debt and invest in greater productivity

The Essentials

At the Queen’s School of Business 33rd annual Business Forecast Luncheon, panel moderator Lynnette Purda said that Canada’s economy in the coming year will be adjusting to falling energy costs. Consumers and manufacturers that do not rely on imported raw materials will benefit, while energy-producing provinces and the Toronto Stock Exchange — dominated by energy stocks — will struggle. Nationally, Purda said, moderate growth of 2.6 percent and a slight rise in interest rates are expected. Purda, associate professor of finance and RBC Fellow of Finance, discusses her forecast in this conversation with QSB Insight.

Video Highlights

0:12     The surprise from 2014 was to see rising inflation alongside lower energy prices. Usually, they are in lockstep. The Bank of Canada does not appear to be concerned about inflation, believing it will be kept in check by lower oil prices. Some economists, however, worry that lower energy prices will weaken the Canadian dollar and increase the price of imports, thereby boosting inflation.

1:37     There are positive and negative consequences from falling energy prices. Beneficiaries are consumers and manufacturers that do not rely on imported raw materials. But hit hard will be energy-producing provinces (though the blow is cushioned by commodities being denominated in U.S. dollars) and the Toronto Stock Exchange, which has 20 percent of its market cap driven by energy companies. 

2:43     National outlook for 2015: moderate growth in GDP of around 2.6 percent; a slight rise on interest rates; and a risk of the housing market cooling off. 

4:05     Some good news for Ontario heading into 2015, and an anticipated strong performance from Newfoundland and Labrador. As well, employers finally seem ready to make an investment in human capital. In terms of sectors, export industries — goods and services, forestry, and machinery and capital equipment in particular — should do well because of the lower Canadian dollar.

5:32     In recent years, Canadian economic growth has been driven by consumer spending. There have been warnings about consumer debt levels, and if interest rates rise as expected, consumers will have to take those warnings more seriously. “We’ve seen too much reliance on consumers in the past. Consumers now have so much debt accumulated that there is no more room for them to spend.”

6:40     Advice for Ontario: Enjoy this coming year but don’t be complacent. “This is a temporary reprieve. . .  It gives us time to make sure our houses are in order. It gives consumers less pressure at the pump. Use that money to actually save or pay down some of the debt. And for companies, use that money to invest in order to increase your efficiency and productivity going forward.”

Interview by Alan Morantz