Varcoe: Interest rates stay put, but sagging Canadian economy and volatile oil price are wild cards

First comes some welcome news from the Bank of Canada — interest rates aren’t going up.

Then, there’s the downside, with expectations of a weakening national economy and a narrower path for a soft landing.

The bank said there’s evidence higher rates are starting to slow the economy and inflation, affecting areas such as consumer spending.

In Canada, the central bank now projects the economy will grow by just 1.2 per cent this year and by a feeble 0.9 per cent in 2024.

It’s not a call for a recession, although it is tepid growth in the coming year.

But as Bank of Canada governor Tiff Macklem also cautioned, inflationary risks have risen since the summer — core inflation is still too high — and the pathway for a soft landing for the economy “has gotten narrower.”

Added to this complex picture are global oil markets, which have been particularly volatile in recent weeks due to geopolitical factors.

“A considerable amount of uncertainty surrounds the forecast,” states the bank’s new Monetary Policy Report.

“Another risk is that the war in Israel and Gaza spreads further into a broader regional conflict, disrupting oil supplies and leading to a resurgence of inflation in energy prices.”

The price for West Texas Intermediate (WTI) oil is now assumed to average US$85 a barrel through 2025, and $90 for Brent crude — both up $10 a barrel.

“Rising global tensions are increasing risks. In a more hostile world, energy prices could move up sharply, supply chains could become disrupted again, and all that could push up inflation again around the world,” Macklem told reporters.

The decision arrives as consumers are still grappling with higher borrowing costs and rising expenses for groceries, mortgages and rent.

Rents in Alberta are 15 per cent higher this month than a year earlier, according to the latest report by Rentals.ca.

Higher interest rates also affect consumers looking to buy major items, such as vehicles or homes, with many scaling back their expectations due to reduced buyer power.

“A project really has to make a lot of sense to move forward within this interest-rate environment.”

While the Canadian outlook is weakening, Alberta’s economy is expected to outperform the country this year due to strong population growth and buoyant commodity prices.

The Conference Board of Canada forecasts Alberta’s economy will expand by 2.6 per cent this year, double the national level, before slowing to 1.9 per cent in 2024.

Amid projections of strong crude prices, oil and gas producers are now making capital spending decisions for 2024. Any jump in energy prices will also hit consumers in the pocketbooks.

“It’s a double-edged sword,” Planincic said.

“Price increases (in oil), that’s a benefit to Alberta producers and a benefit to the Alberta government’s bottom line . . . However, the challenge is from a global perceptive, that could increase the likelihood of a recession or a further slowdown in consumer spending.”

Alberta is expecting to see major investment decisions on decarbonization initiatives in the coming years, such as Dow’s proposed ethylene cracker and derivatives complex at Fort Saskatchewan, or the Pathways Alliance’s planned carbon capture and storage network, noted Calgary Chamber of Commerce CEO Deborah Yedlin.

“Even if we see slower growth across the country, Alberta is still in a very unique position, where it won’t be as affected because of all of the things that are going on,” she said.

Prices for WTI oil closed up $1.65 on Wednesday to $85.39 a barrel, while Brent crude traded around $90. It’s worth noting both prices are now at the Bank of Canada’s assumptions.

“The risk to that is likely to the upside at this particular moment,” said Rory Johnston, founder of the Commodity Context newsletter.

“Prior to what was happening in the Middle East, my (2024 price expectation) was . . . somewhere between mid $90s and $105, just given how tight everything looked” between supply and demand.

The uncertain state of the provincial economy is also captured by a new report from the Business Council of Alberta.

Wage increases in the province, which have lagged behind the rest of the country, are now exceeding inflation, while population growth has reached levels not seen since the 1980s.

However, Alberta lost more than 38,000 jobs in September, according to the latest Statistics Canada report, which could be a one-month blip or the sign of a bigger trend, added Planincic.

“It is very mixed,” she said.

“Ultimately, high interest rates and a slowing global economy, these things are already affecting Albertans and Alberta businesses — and we’re going to continue to see that play out.”

Chris Varcoe is a Calgary Herald columnist.