It’s not just a Canadian crisis. January has been the worst start to a year on record for global equities as investors worry about signs of a massive slowdown in Chinese growth and weaker terms of international trade.
Amid the global chaos, there was a glimmer of hope in Ontario economic data that suggested 2016 could usher in a long-predicted fundamental shift toward areas of the economy that have been overshadowed by oil.
A global crude crisis that saw oil close below $ 30 a barrel for the first time since 2003 on Friday is spooking investors as they eye a slower global growth outlook, a glut in U.S. production and the prospect of increased Iranian supplies once sanctions are lifted.
The TSX closed down 2 per cent at 12,074 Friday. The Dow Jones industrial average plunged 391 points, European stocks fell into a bear market and the Shanghai Composite Index wiped out gains boosted by state intervention.
“The axis of economic growth is very much shifting back to the provinces that were in the rain shadow of the oil boom and Ontario would be the prime example,” said the senior fellow at the Centre for International Governance Innovation.
“It’s really a reorientation of the economy and an opportunity here for a new economic model.”
Signs of realignment in Canada’s economy are trickling in.
Data suggests the benefits of a weak loonie are starting to work their way through the economy, albeit slowly.
The growth in exports was the biggest since 2013, thanks to a declining dollar that makes Canadian goods cheaper on world markets. Manufacturing rose 2.8 per cent, after falling 0.3 per cent in the previous quarter.
November trade data showed Canadian exports rose 0.4 per cent to $ 43.3 billion, reversing three months of declines. The increase would have been a more substantial 1.6 per cent, excluding a 6.6 per cent drop in energy exports.
Ontario added 35,000 jobs in December, the strongest growth of all provinces, which lowered its unemployment rate from 6.9 to 6.7 per cent. Meanwhile, Alberta shed 4,000 jobs last month to bring the total job loss in the oil-dependent province to 14,600 in 2015.
Since crude began its steady downward slide in mid-2014, much of the pain has been concentrated in the energy sector. But the hit to that sector — which accounts for less than 10 per cent of the economy, but a much larger share of exports and business investment — has impacted the entire economy.
The negative impact of the oil crisis has been immediate and acute, while the full impact of the corresponding depreciation of the loonie could be a three- to five-year process, the Bank of Canada and others have said.
Given the gathering economic storm clouds, an increasing number of economists believe the central bank will lower interest rates next week to encourage borrowing and drive the loonie lower. Some observers are calling for the dollar to reach new lows, below the 61.8 cents it reached in 2002.
That would herald an even bigger competitive advantage for dollar-sensitive sectors of the economy, such as manufacturing, film and tourism, which economists hope will eventually be able to fill the void left by the oil downturn.
The key to the economic turnaround, experts say, is patience.
Canada has successfully adapted to downturns in commodity cycles throughout its history — from furs to wheat and now oil — and there’s no reason to panic that it won’t happen now, said Stephen Gordon, professor of economics at Laval University.
“Yes, it was good while it lasted,” he said of the oil boom. “But it’s not a complete catastrophe now that it’s gone.”
The Liberals campaigned on a promise to pour an additional $ 60 billion (Can.) into infrastructure projects over 10 years. But less than half that money, $ 17.4 billion, was earmarked to flow over the next four years.
Prime Minister Justin Trudeau emphasized the importance of innovation and diversification to Canada’s economy at a visit to Google’s engineering headquarters in Waterloo this week.
He told reporters the government remains committed to investments in research and development, social housing, transit and energy efficiency, but declined to comment on whether spending will be fast-tracked in this year’s budget.
Canada will face a significant hurdle in jump-starting nonenergy-related sectors after falling slightly behind its peers on productivity, research and development, and innovation during the crude boom, said OECD economist Peter Jarrett.
“Hopefully, we can do better in the future as we shift into sectors that allow us more value-added (industries) than just the traditional primary commodity sectors.”
There is reason to be optimistic that Canada’s tech and innovation sectors are picking up steam — they have grown faster than any other on the Toronto Stock Exchange since 2013.
But manufacturing will still be a crucial part of the solution, Jarrett said. Though he expected data to show more positive benefits from the low loonie, he expects investment to return once the currency’s volatility settles.
“It takes a while to convince people that it’s durable and sustainable,” he said.
“We’ve got to give it a chance to work.”
With a file from Rob Ferguson