The Prescription For Canada: Oil Off The Boil - BMO Capital Markets



    TORONTO, July 9 /CNW/ - The received wisdom in recent years that the
Canadian economy benefits on balance from higher oil prices, given the
country's status as a significant (and growing) net energy exporter, is in
serious need of review, according to a new report from Douglas Porter, Deputy
Chief Economist, BMO Capital Markets.
    "There is a strong case to be made that the surge in oil and gas prices
crossed the tipping point this spring from providing some economic ballast for
the domestic economy to acting as a heavy anchor," said Porter. "Even at a
time when the trade surplus on energy goods has reached an all-time high of
nearly 5 per cent of GDP, the negative hit on the prospects of Canada's major
trading partners and consumers looms much larger.
    "Some sustained moderation in oil and gas prices would be the most
positive near-term development possible for the greater good of the Canadian
economy at this stage," he stated.
    Porter notes three channels where higher energy prices become too much of
a good thing:

    
    -   Industry:  The surge in energy costs is first and foremost a problem
        for domestic industry, since it raises costs across the board and
        hammers growth prospects in the industrialized world. "Even the oil
        and gas sector has been unable to make much of a contribution to real
        output growth in recent years," according to Porter. "Its share of
        GDP has actually dropped significantly from its peak in the mid-90s
        amid fading production of conventional oil & gas and despite rising
        oil sands output." Meanwhile, the latest charge in gasoline prices
        has taken direct aim at U.S. auto sales, which has hit Canadian
        industry hard.

    -   Consumers: The energy price spike has also landed a direct hit on
        Canadian consumer sentiment and wallets. While sentiment is still
        somewhat healthier than in the U.S., thanks to solid real wage gains
        and a much stronger job market in Canada, the sag in domestic
        confidence has also put a chill into the housing market. Plus, while
        raging gasoline prices have been hogging the headlines, natural gas
        has been quietly rising every bit as fast as crude oil in the past
        year (doubling in that period), and this will wallop household
        heating bills this winter. With many of the energy input costs for
        hydro companies on the march, it is only a matter of time before
        electricity prices also lurch higher in many provinces. Accordingly,
        total spending by Canadian households on energy likely hit an all-
        time high as a share of disposable income in the second quarter of
        about 7 per cent and looks poised to continue heading higher.

    -   Inflation: The dramatic sprint in energy costs is also finally making
        an important impact on Canadian headline inflation. After largely
        sheltering Canadians from global inflation forces for years, the
        latest Bank of Canada Business Outlook Survey revealed that companies
        are now preparing to ramp up prices, and many expect inflation to
        stay above target. The CPI report for June, due later this month,
        could hit the 3 per cent barrier, and threatens to push above the top
        end of the Bank of Canada's comfort range in the next few months.
        Also, these figures are still flattered by the 1-point GST cut at the
        start of the year, meaning the underlying inflation rate will be
        closer to 3.5 per cent.

    The complete report can be found at www.bmocm.com/economics.
    




For further information:

For further information: Media Contacts: Peter Scott, Toronto,
PeterE.Scott@bmo.com, (416) 867-3996; Lucie Gosselin, Montreal,
lucie.gosselin@bmo.com, (514) 877-8224; Laurie Grant, Vancouver,
laurie.grant@bmo.com, (604) 665-7596; Internet: www.bmo.com


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