The Americas | Canada’s economy

Beyond petroleum

Growth is shifting from the oil-producing west back to the traditional economic heartland. Political power could shift with it

|TORONTO

“THE oil industry isn’t remotely the entire Canadian economy,” declared the prime minister, Stephen Harper, on January 22nd. That is not a startling statement. Production of crude oil represents just 3% of Canada’s GDP. The surprise is that Mr Harper felt he has to state the obvious. In an economy dominated by services, Mr Harper and his Conservative Party have cast themselves as champions of the oil industry, which is centred in Alberta, his adopted home province.

He pulled Canada out of the Kyoto protocol on climate change and promoted the Keystone XL pipeline that would carry Alberta bitumen to refineries in the southern United States. He has likened the development of Alberta’s tar sands to building the Great Wall of China. Canada, the fifth-largest producer of crude oil (which makes up 14% of exports), is an “emerging energy superpower”, Mr Harper has proclaimed.

But the drop in oil prices—by more than half since last June—has checked that boastfulness. It has shifted the engines of economic growth from western Canada to the central provinces of Ontario and Quebec, which concentrate on services and manufacturing. The weakness in the energy sector prompted a surprise cut in interest rates by the Bank of Canada on January 21st. The federal government, which usually delivers its budget by the end of March, has put that off until April at the earliest. Volatile energy markets make it impossible to predict revenue accurately, says Joe Oliver, the finance minister. These wobbles are awkward for Mr Harper, who hopes to win this October’s general election by campaigning on the Conservatives’ record of economic competence.

Canada is hardly Venezuela, whose oil-dependent economy is expected to contract by 7% this year. The central bank predicts growth of 2.1% this year and 2.4% in 2016. That is modest, but it is no worse than the 2.1% average of the past two years. The unemployment rate, at 6.7%, is relatively low. While the energy slump will boost some parts of the country, it will depress others. Oil-rich Alberta, which has grown faster than the rest of Canada for the past 20 years, will enter recession this year, predicts one think-tank, the Conference Board of Canada.

Hence the central bank’s decision to reduce the target for its key interest rate by a quarter of a percentage point from 1%, its level since September 2010. This puzzled the financial markets. Core inflation is 2.2%, well within the bank’s target range. Lower rates could encourage consumers, who are already carrying record levels of debt, to take on even more. Stephen Poloz, the central bank’s governor, acknowledged the risk but argued that the recession in the oil industry made it worth taking. He fears that the loss of jobs, investment and export income from the energy sector will eventually spread to other parts of the economy. The rate cut, he said, was like taking out an insurance policy.

Ontario and Quebec, which account for more than half of Canada’s GDP, see less reason to worry. They are home to large manufacturing industries, such as cars and aerospace, which have long complained that the oil-fuelled rise in the Canadian dollar was damaging their competitiveness. The currency has fallen by 15% against the American dollar since June, giving exports a boost, and may weaken further because of lower interest rates. Strong growth in the United States, Canada’s biggest trading partner, bodes well for manufacturers. Ontario is set to replace Alberta this year as the growth leader.

This shift in economic bragging rights has given a lift to the Liberal Party, which governs some of the perkier provinces and holds a narrow lead over the Conservatives in national opinion polls. Kathleen Wynne, Ontario’s Liberal premier, has cheekily offered to help devise a national energy strategy, tramping into Alberta’s bailiwick. The finance minister of Liberal-led Quebec credits low oil prices with helping him balance the province’s budget (while Alberta faces a C$7 billion, or $5.6 billion, revenue drop).

This jauntiness, less than a year away from the next general election, is unlikely to please the petroleum-spattered prime minister. To counter it, Mr Harper will remind voters incessantly during the forthcoming campaign that Canada emerged faster than other members of the G7 club of big economies from the 2008 financial crisis, with its banking system intact.

There are two threats to his campaign plan. The first is that, as the central bank fears, the petro-plunge will pull down growth overall. The second is that the economy will continue to do relatively well but that the Conservatives will not get credit for it. The government’s contortions over the budget make that second prospect more likely. Mr Oliver promised a balanced budget as recently as January 26th, despite the expected drop in revenues from the energy industry. The government had pledged a raft of tax reductions once that was achieved, but imprudently enacted them late last year. The delay in presenting the budget adds to the impression of fiscal disarray. Justin Trudeau, the Liberals’ leader and a former teacher, mocked Mr Oliver’s excuse for delaying the budget as the political equivalent of “The dog ate my homework”.

Mr Harper is a skilled political scrapper; he may well find a way to turn the shift away from oil-led growth to his advantage. His proclamation that the economy is about more than energy is a beginning. Now he must persuade Canadians that is true of the Conservatives, too.

This article appeared in the The Americas section of the print edition under the headline "Beyond petroleum"

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