How long will lower oil prices leave the Canadian economy reeling? The question, to be sure, is an open one, and a matter of contentious debate.
Bank of Canada Governor Stephen Poloz has been unequivocal: He believes oil prices will serve as a severe drag on activity in the first quarter of the year, with the economy failing to expand.
Recent subpar economic data have seemingly reinforced the governor's opinion, with the Bank's latest monetary policy review indicating that "the negative effects of lower oil prices are materializing rapidly."
By the third quarter of the year, the Bank thinks the economy will be firing on all cylinders, recording growth of 2.8 per cent. Under this view, the January rate cut was sufficient medicine for the Canadian economy.
Intuitively, however, it's hard to square the notion that a near-halving of oil prices over the course of a year is something that will dampen growth for one quarter or two, given the outsized role Alberta has played in driving investment, employment, and economic growth since the financial crisis.
CIBC World Markets is in the camp that believes the oil-induced Canadian economic slump will be a more drawn-out affair. The bank is projecting growth of 0.8 per cent in the first three months of the year, 0.6 per cent in the second quarter, and 0.7 per cent in the third quarter before a strong rebound in the final three months of 2015.
While every forecaster's crystal ball remains cloudy, senior CIBC economist Andrew Grantham parses some first-quarter data and finds evidence that oil's bite on the economy hasn't been particularly harsh as of yet.
Non-residential building investment – which includes industrial, commercial and institutional – inched downwards on an annual basis, but the oil-producing provinces weren't responsible for the decline. On a cumulative basis, Alberta, Saskatchewan, and Newfoundland saw spending on non-residential building construction rise 3 per cent in the first quarter relative to the same period in 2014.
As such, a plunge in oil-related investment spending doesn't look to be a first-quarter story, nor should we have expected it to be, according to Mr. Grantham. "It makes sense to us that companies wouldn't pull the plug on any projects that were up and running or in a mature stage of development," he said. "We think that new investment, coming along in the second and third quarters, will see the weakest trends."
It's difficult to attribute the weak economic data in Canada to a slowdown in the oil sector as opposed to lacklustre growth in the United States, where another particularly harsh winter and some one-off factors weighed on activity, Mr. Grantham added.
The abysmal March core durable goods orders in the United States implied that the hand-off to the second quarter was weaker than anticipated; that investment spending, and the economy as a whole, may not be poised for as sharp a rebound in growth as seen during the second quarter of 2014.
The acute weakness in this particular segment is of particular concern for Canada, as Mr. Poloz has highlighted that many of the non-commodity export segments that are expected to lead the recovery are linked to U.S. capital spending.
Despite forecasting growth rates below 1 per cent in the first three quarters of the year, CIBC World Markets doesn't think the Bank of Canada will cut rates again.
"If oil prices are continuing to edge up in the third quarter, the Bank of Canada might be able to say, 'well there may be one more weaker quarter than we had expected, but we can look forward to better times ahead and don't need the extra stimulus,'" said Mr. Grantham. "It is a difficult balancing act."
The timeliness of Canadian economic data releases also provides an argument in favour of inaction from the central bank in the near-term. The Bank of Canada meets once more during the second quarter, in late May, at which time even the first-quarter growth statistics will not be publicly available. By the timing of its next Monetary Policy Report in July, little second-quarter data will have trickled out.
So as long as stronger economic growth appears to be imminent, the Bank has a bias to hold the line on rates – even if this "front-loaded" soft patch stretches through the summer months.