January 14, 2016 / 2:30 PM / 3 years ago

Oil to drag on Canada economy but no recession or rate cut: poll

(Reuters) - Stubbornly low oil prices will weigh on the Canadian economy in 2016, but no recession or further interest rate cut by the Bank of Canada are expected this year, a Reuters poll found.

A gas nozzle is used to pump petrol at a station in New York February 22, 2011. REUTERS/Shannon Stapleton

The survey of more than 40 analysts showed Canada’s economy is forecast to grow 1.8 percent this year and 2.2 percent the next, a slight downgrade from the 2.0 percent forecast for 2016 in October’s poll.

That also is much lower than the United States, which is expected to grow 2.5 percent and has already begun hiking rates.

But with oil prices continuing to drop and no prospect of a strong rebound any time soon, some also see a risk that the Canadian economy could fall back into recession for the second time in as many years.

The fiscal stimulus plan proposed by the newly elected Liberal government is also unlikely to boost economic growth much.

The poll put a median 35 percent probability the economy slips back into a slump this year. Forecasts ran from a low of 15 percent to as high as 75 percent.

“We expect an acceleration from last year but only a pretty modest one,” said Andrew Grantham, senior economist at CIBC, adding that the economy will grow fairly below the “pace that we had been accustomed to before the oil price shock in mid-2014.”

The price of oil, a major Canadian export, has plunged more than 70 percent since mid-2014 to near $30 a barrel. It is expected to remain depressed through the year.

To soften the blow of the oil price shock, the Canadian central bank surprised financial markets with an interest rate cut about this time last year and followed it up with another 25 basis point reduction in July.

That, along with volatile oil prices, however, has sent the commodity-driven currency down more than 30 percent to its lowest in 12 years.

But Bank of Canada Governor Stephen Poloz anticipates a non-energy export-led recovery in Canada, driven by stronger U.S. demand for Canadian goods and helped by a weaker Canadian dollar.

Many economists said that view is too optimistic as U.S. economic growth has been persistently downgraded since last year and exports have not materially picked up.

According to Thomas Costerg, senior economist at Standard Chartered, the Bank has maintained a “glass half full” view of the Canadian economy.

“But recent weaker data and the persistent pressure on commodity prices mean this position is no longer tenable,” he says. “The hope of ‘salvation’ via non-commodity exports remains elusive, too.”

Canada slipped into a mild recession in the first half of last year and although growth picked back up in the third quarter of 2015, a slightly greater than one-in-three chance of another one is significant.

Economists as a group are usually slow to forecast recessions. Past analysis of Reuters poll data shows that once the median probability of recession reaches 40 percent, it is highly likely that a recession already has begun.

“The probability of a double-dip recession is high as the ongoing drop in commodity prices threatens energy investment, which could come under sizeable pressure again in 2016,” said Standard Chartered’s Costerg.

While the BoC is largely expected to keep rates on hold until 2017, seven of 40 analysts expect the central bank to cut rates on its Jan. 20 policy meeting to bolster the recovery. That is up from just one analyst predicting the same in the previous poll.

Markets are pricing a nearly 45 percent chance the Bank will cut next week.

But there are concerns that years of low borrowing costs have prompted Canadians to take on too much debt, overheating the housing market. The household debt to income ratio was at a record 163.7 percent in the third quarter.

Some economists say after nearly doubling in value over the past decade, house prices will fall sharply and pose a risk to Canada’s financial stability.

Polling by Anu Bararia; Editing by Bill Trott

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