A. Price Levels and Exchange Rates

1. Background

A January 2015 report by the Bank of Canada stated that the depreciation in the value of the Canadian dollar from June 2014 to February 2015 caused the price of imported goods to rise over that period, and core inflation was 0.2 to 0.3 percentage points higher during the second half of 2014 than would have been the case had the depreciation not occurred. It highlighted that this increase in core inflation was offset by two factors that exerted downward pressure on prices and limited net growth in core inflation over the same period: excess capacity in the economy and competition in the retail sector. The report projected that the impact of the depreciation on core inflation will gradually disappear in 2016, and that core inflation will remain slightly below the 2.0% target until the end of 2016.

As explained in a 2012 Bank of Canada backgrounder, Canada’s exchange rate is affected by a number of domestic factors, including the following:

• the relative performance of the Canadian economy;
• the difference between interest rates in Canada and other countries;
• the difference between inflation rates in Canada and other countries; and
• the flow of goods, services and investment income between Canada and other countries.

It is also affected by a number of external factors, including the following:

• the world price for commodities;
• the global economic growth rate; and
• global economic stability.

Figure 5 summarizes the relationship between the global price of oil and the Canadian economy through five main channels, and shows the link to Canadian income, exchange rates and inflation.

Figure 5 – Relationship between Global Oil Prices and the Canadian Economy

Source: Figure prepared using information obtained from: Bank of Canada, Monetary Policy Report, January 2015.

According to the Bank of Canada’s 2012 backgrounder, and as illustrated in Figure 6, the world price for commodities – including oil – is the main determinant of the relative value of the Canadian dollar over the long term. According to a January 2015 report by the Bank of Canada, the recent decrease in the exchange rate between the Canadian and U.S. dollars is mainly the result of reduced oil export revenues and business investment in Canada’s oil sector.

Figure 6 – U.S. dollar price of oil in real (March 2015) dollars and Canada–U.S. exchange rate (monthly; January 1974–March 2015)

Note: “Price of oil” is U.S. Crude Oil Composite Acquisition Cost by Refiners, expressed in real (March 2015) U.S. dollars based on the U.S. Consumer Price Index for All Urban Consumers.

Sources: Figure prepared using information obtained from: U.S. Energy Information Administration, Petroleum & Other Liquids, “U.S. crude oil composite acquisition cost by refiners,” Data; U.S. Bureau of Labour Statistics, “Consumer Price Index – All Urban Consumers, U.S. All Items,” Data Tools: Top Picks; and Statistics Canada, Table 176-0064, “Foreign exchange rates, Bank of Canada (monthly),” at closing, in U.S. dollars (CANSIM database).

As indicated in the Bank of Canada’s January 2015 report, as these business investments in the oil sector are partly financed by foreign capital, the result has been a reduction in the net inflow of foreign capital into Canada over the past year; together with lower oil export revenues, this reduction in foreign capital has led to a depreciation in the value of the Canadian dollar. Business investment in Canada’s oil sector has also been affected by this depreciation, as inputs imported from the United States have become relatively more expensive.

While the decline in global crude oil prices has negatively affected Canada’s oil sector, exporters in non-energy sectors – such as manufacturing – have become more internationally competitive as a result of the depreciation in the value of the Canadian dollar. Along with higher foreign demand for Canadian non-energy exports, the depreciation has led to an increase in sales by non-energy sector exporters, and could lead to higher business investment in these sectors.

2. Witnesses’ Views

Witnesses spoke about the effect of lower oil prices on inflation and economic activity, Canadian exchange rates, international competitiveness and Canadian exports, and savings and spending decisions by North American consumers.

In commenting that its monetary policy is focused on returning inflation to a 2.0% target over the medium term, the Bank of Canada mentioned that its 21 January 2015 decision to reduce the target for the overnight interest rate by one quarter of one percentage point was designed to mitigate the negative impact of falling oil prices on the Canadian economy. Like Unifor, it predicted that the price of Brent crude oil is likely to remain at about US$60 per barrel through to the end of 2016, assuming that its base case scenario is realized. Moreover, the Bank of Canada suggested that – in the absence of any monetary policy response – Canadian real GDP would have been about 1.4% lower than its baseline forecast of 2.5% by the end of 2016, and that the output gap – the difference between actual economic activity and the potential full capacity level of economic activity – would have been eliminated in 2017, rather than by the end of 2016.

Unifor noted that, in recent years, the net demand for Canadian exports decreased, while increases occurred in the price of oil, the relative value of the Canadian dollar and foreign investment. According to Canadian Manufacturers & Exporters, while one half of the recent decline in oil prices can be explained by demand and supply conditions in the oil sector, the remainder is the result of a strengthening U.S. dollar relative to other currencies, as oil prices are denominated in that currency. Moreover, it said that a declining price of oil that is partly due to a strengthening U.S. dollar is a signal that the global economy has problematic financial imbalances.

Moreover, Unifor stated that the value of the Canadian dollar has appreciated against the currencies of major countries with which Canada competes in relation to manufacturing. It explained that, while oil prices declined from June 2014 to February 2015, the value of the Canadian dollar increased relative to the euro, and remained stable relative to the Japanese yen and the Mexican peso, the latter of which is the currency for a country that it indicated is the largest source of Canada’s imported automotive products.

According to Unifor, the most beneficial impact of lower oil prices on the Canadian economy will be the decline in the relative value of the Canadian dollar to the point where it more accurately reflects the currency’s buying power relative to the country’s cost of living. It suggested that this depreciation will have immediate and longer-run effects on net demand for Canadian goods and services in all tradable sectors, including manufacturing, tourism and certain services. As well, Unifor commented that a lower relative value for the Canadian dollar helps the country’s petroleum and resource sectors by mitigating some of the impacts of the decline in global oil prices.

That said, Unifor and the Forest Products Association of Canada stated that the ability of a lower Canadian exchange rate to enhance international competitiveness and restore capacity in the manufacturing sector that was lost during the last decade will depend on the duration of that lower exchange rate.

RBC Financial Group expected the decline in oil prices to result in savings of $150 billion for U.S. consumers, which it felt should lead to increased spending in other areas; consequently, Canadian exports to the United States should rise. Moreover, it said that Canadian consumers will save $11 billion, with those savings leading to more spending.

B. The Oil and Gas Sector

1. Background

The recent decline in global oil prices is expected to reduce capital investments and production in Canada’s oil sector. Some companies – such as Suncor Energy Inc., Cenovus Energy and Canadian Natural Resources Limited – have already announced reductions in their expected capital expenditures for 2015.

A January 2015 report by the Conference Board of Canada forecasted a 23.0% decrease from 2014 to 2015 in real business investment in capital and exploration in Canada’s oil sector; declines of 6.6% in oil production and 2.7% in construction activity are expected, due mostly to significant declines in energy investment.

Moreover, according to the Conference Board’s January 2015 report, Alberta – which accounts for about 77.0% of Canada’s total oil production – is expected to have its real GDP decline by nearly 5.0% in 2015. Saskatchewan, which accounts for approximately 13.4% of the country’s oil production, is estimated to have its real GDP fall by nearly 2.0% in 2015, while the percentage for Newfoundland and Labrador – which produces roughly 6.4% of Canada’s oil – is also expected to be 2.0%.

A 2015 report by the International Energy Agency stated that, in the short run, the current decline in global oil production is likely to be offset by oil companies wanting to maximize their output in order to recoup investments in existing projects. However, conventional oil projects – oil projects that do not need specialized processes for extraction and transportation – will likely experience sharp declines in production, as drilling activity occurs mostly in the winter months. As mentioned in a January 2015 report by RBC Economics, oil sands projects have high upfront capital costs and long pay-back periods, with the result that producers will likely delay new projects due to the higher oil prices that are needed to cover the significant upfront costs.

An August 2013 report by the House of Commons Standing Committee on Energy, the Environment and Natural Resources found that the decline in oil prices could also affect the transportation of oil. It stated that, as transporting oil by rail tends to be more expensive than by pipeline, lower oil prices may make it less profitable to move oil by rail; pipeline transportation services are not expected to be significantly affected by the decline in global oil prices unless these prices fall to levels that result in lower oil production.

2. Witnesses’ Views

Witnesses mentioned reduced capital investment in Canada’s oil and gas sector, decreased Canadian oil production and methods to increase export markets for Canadian oil. The Canadian Association of Petroleum Producers commented that expected capital investment in oil production in 2015 will decrease by one third, from the planned $70 billion to approximately $50 billion. Encana Corporation noted that it is reducing its capital investment in 2015 by $700 million, $300 million of which is in Canada, and Suncor Energy Inc. said that its capital budget for 2015 will fall by $1 billion.

In highlighting the level of oil drilling and the number of oil rigs, the Canadian Association of Petroleum Producers stated that drilling for conventional oil has declined by more than one third since January 2015, and Packers Plus Energy Services mentioned that the number of North American oil rigs has dropped dramatically since November 2014.

Moreover, the Canadian Association of Petroleum Producers indicated that its member companies will increase oil production by 150,000 barrels of oil per day in 2015 and by 190,000 barrels per day in 2016. According to Andrew Leach, the increase is likely to be less than expected if oil prices and supplies remain at their current levels.

In focusing on the effect of global oil price changes on corporate revenues, Suncor Energy Inc. explained that a $10 per barrel change in the price of oil results in a $1 billion change in revenues. Andrew Leach mentioned that the spot price for oil influences the cost of developing new projects, and that existing projects are viable at a lower price of oil due to the higher price of oil during their initial development.

The Canadian Association of Petroleum Producers, Encana Corporation and Suncor Energy Inc. identified the need for increased market access through the construction of pipelines to transport oil and gas from Western Canada to Canada’s east and west coasts. Packers Plus Energy Services suggested that Canadian oil delivered to the coast could be sold at a price that is similar to that of Brent crude oil, rather than the price of WTI crude oil, which is lower. The Alberta Federation of Labour predicted that pipelines to access new markets would not raise the price of Canadian oil, as the number of refineries in the world that can process Canadian oil produced from bitumen is limited. Similarly, Andrew Leach said that, because of additional refining costs, oil produced from bitumen would not be sold at the same price as that of Brent crude oil if it was exported.

C. The Renewable Fuels and Energy Generation Sector

1. Background

Biofuels from renewable sources, such as ethanol and biodiesel, can be substitutes for gasoline and diesel fuels. Ethanol is typically made from corn or wheat, while biodiesel is made from vegetable oil and animal fat. According to a Natural Resources Canada report, in 2013, Canada was the world’s fifth-largest biofuel producer, accounting for 2.0% of global supply.

The biofuel sector benefits from federal and provincial regulations that have established minimum renewable fuel content levels in gasoline and diesel. In particular, the federal government mandates that 5.0% of the gasoline sold in Canada, and 2.0% of diesel and heating oil, have content from renewable sources. In addition, five provinces – British Columbia, Alberta, Saskatchewan, Manitoba and Ontario – have biofuel regulations that are similar to, or more stringent than, the federal requirements.

The supply of, and demand for, electricity are affected by population, GDP growth and industrial development. According to Statistics Canada, the mining, as well as the oil and gas extraction, sectors accounted for nearly 19.0% of the total industrial use of electricity in Canada in 2013; the oil and gas extraction sector is concentrated mostly in Alberta.

2. Witnesses’ Views

Witnesses commented on federal mandates for ethanol and biodiesel, Canadian ethanol exports and the electricity generation sector. The Canadian Renewable Fuels Association noted that the federal mandates for blending ethanol in gasoline sources and biodiesel in diesel sources, when these are destined for retail sale, have offset the effects of the low retail demand for ethanol that has resulted from falling gasoline prices. It explained that the wholesale price of ethanol has historically been $0.20 per litre less expensive than gasoline, resulting in retailers blending ethanol at ratios higher than the federal mandates; with falling crude oil prices, retailers have less incentive to blend at a higher level than the mandated rate.

As well, the Canadian Renewable Fuels Association highlighted that the United States has reduced its ethanol imports, which has affected the demand for Canadian ethanol.

In focusing on the long-term impact of declining oil prices on the electricity generation sector, TransAlta Corporation said that investments to renew power generation infrastructure will be more difficult to make.

D. The Manufacturing Sector

1. General Background

A decrease in global oil prices generally reduces the value of the Canadian dollar relative to the U.S. dollar. In turn, this depreciation affects Canada’s manufacturing sector through two main channels: output prices and input costs.

Given Canada’s small size relative to the United States, which is the country’s largest trading partner, Canada is generally a “price taker.” According to Industry Canada, almost 80.0% of the value of Canada’s manufacturing exports are destined for the United States and, thus, are traded in U.S. dollars. In the short term, when exports are valued in Canadian dollars, a decrease in the Canada–U.S. exchange rate results in an increase in output prices for Canadian manufacturers that export to the United States. As noted in an August 2005 working paper by the Bank of Canada, everything else remaining the same, higher output prices lead to increased profitability for Canadian manufacturers.

The August 2005 Bank of Canada working paper found that, in the long term, a depreciation in the value of the Canadian dollar may lead Canadian manufacturers to reduce their output prices – expressed in U.S. dollars – in order to be more competitive with U.S. manufacturers. With this price competition, Canadian manufacturers could increase the value of their exports to the United States.

For Canadian manufacturers that import U.S. goods that are used as production inputs, because those imports are priced in U.S. dollars, a decrease in the Canada–U.S. exchange rate results in increased input costs for these manufacturers. Everything else remaining the same, higher input costs reduce profitability.

Some goods are both outputs and production inputs for Canadian manufacturers, such as softwood lumber, metal products and plastic products. An industrial product price index measures the change in price, applied at the factory gate, for major commodities. Figure 7 shows the increase in the industrial price, for Canada and the United States, for softwood lumber, plastic and rubber products, and primary ferrous metal products; industrial price increases were higher in Canada than in the United States from January 2013 to December 2014.

Figure 7 – Industrial Price Increase, Canada and the United States, by Selected Product Group, January 2013–December 2014

Sources: Figure prepared using information obtained from: Statistics Canada, Table 329-0075, “Industrial product price index, by North American Product Classification System (NAPCS), monthly”; and U.S. Department of Labor, Bureau of Labor Statistics, Producer Price Index Industry Data.

The share of Canadian manufacturers’ output that is exported to the United States is typically greater than the share of their inputs imported from that country; consequently, on average, Canadian manufacturers benefit from a decline in the Canada–U.S. exchange rate. This depreciation may also result in Canada’s manufacturing sector becoming increasingly attractive for foreign direct investment from the United States.

2. Automotive Manufacturing

According to Statistics Canada, Canada’s automotive sector – including motor vehicles and parts manufacturing – represented more than 10.0% of all manufacturing in 2014. As a result of the recent recession, production in this sector declined as a share of total manufacturing GDP in Canada, falling from 10.7% in 2007 to 7.0% in 2009. Automotive production increased in the post-recession period, as its share of total manufacturing GDP peaked at 10.4% in 2012; in 2014, its share was about the same. In real dollar terms, GDP in Canada’s automotive sector remains below its pre-recession level; it was $18.0 billion in 2014, down from $19.8 billion in 2007.

Automotive production is integrated throughout North America. Most of Canada’s automotive production is exported, almost exclusively to the United States. In turn, U.S. automotive parts imports are a significant input into Canadian automotive production and exports; this characteristic distinguishes the automotive sector from most other manufacturing sectors in Canada. Industry Canada has indicated that, in 2014, Canada’s automotive exports were valued at $66.3 billion, while the country’s automotive imports totalled $85.4 billion; the resulting trade deficit was $19.1 billion.

According to a May 2014 report by RBC Economics, the slow recovery in Canadian motor vehicle assembly following the recent recession reflects shifting production patterns across North America since the enactment of the North American Free Trade Agreement. It highlighted that Mexico’s share of North American automotive production increased from 7.0% in 1994 to 20.0% in 2011, and stated that – partly due to relatively high Canada–U.S. exchange rates following the last recession – the shift towards Mexican automotive production has intensified in recent years. While automotive sales and production in Canada are expected to increase over the next few years along with U.S. economic growth and a lower Canada–U.S. exchange rate, it noted that a planned expansion of capacity in Mexico and higher investment in the United States could further reduce Canada’s share of North American automotive production.

3. Steel Manufacturing

An October 2013 report by the Canadian Steel Producers Association noted that Canada’s steel manufacturers produce about 14 million tonnes of steel each year, with annual sales of up to $14 billion; about one third of all Canadian steel shipments are exported. According to it, while steel products – including construction materials, fabricated structures and drilling equipment – are supplied directly to wholesalers, contractors and consumers, steel manufacturers are also part of the supply chain for major Canadian industrial sectors, notably automotive, energy and construction.

4. Forest Products Manufacturing

A May 2014 report by the Forest Products Association of Canada suggested that the forest products manufacturing sector generates $19.2 billion in annual GDP, which represents about 9.2% of overall production in the manufacturing sector.

According to a May 2014 report by the Centre for the Study of Living Standards for the Forest Products Association of Canada, during the 2008–2009 recession, economic activity in the forest products sector – as measured by real GDP – fell by 19.0% and real capital investment in the sector fell by 40.0%. It noted that, although the sector’s economic activity increased from 2009 to 2012, its GDP and capital stock remain below pre‑recession levels. Moreover, it stated that – beyond recent business cycle impacts and the effects of a higher Canada–U.S. exchange rate that existed until 2014 – declines in real GDP from 2000 to 2012 were caused by longer-term structural changes in the demand for forest products, including the shift towards electronic media. According to it, as of 2009, the nominal value-added share of the forest products sector in Canada’s economy reached its lowest proportion in 50 years; it was 1.1% in that year, down 3.2 percentage points from 4.3% in 1961.

The Forest Products Association of Canada’s May 2014 report also stated that gains in technology – acquired through research and development, and the replacement of outdated capital assets – supported the international competitiveness of the wood product manufacturing sector during the recovery from the recent recession, as labour productivity grew at an average annual rate of 1.7% from 2008 to 2012. Over the same period, paper manufacturing labour productivity fell by 2.3%, which limited productivity gains in the forest products sector overall.

5. Witnesses’ Views

Witnesses spoke about the effects of declining global oil prices on the manufacturing sector generally, and on three subsectors in particular: automotive, steel manufacturing and forest products manufacturing.

The Canadian Labour Congress said that, in business planning, Canada’s manufacturing sector is considering a number of factors, including the following: the decline in global oil prices; geopolitics in the Middle East; economic instability in Europe; and U.S. reactions to European instability. In particular, it noted that, following a recession‑induced semi-permanent loss of capacity in several manufacturing sectors that export, business investments in manufacturing and in other areas have been slow to return to previous levels. In its view, employers in the manufacturing sector will increase investment and hiring only once the Canadian economy shows sustained growth and if an exchange rate of C$0.80 for every US$1.00 prevails.

According to Philip Cross, production in Canada’s manufacturing sector is unlikely to return to the levels in the years prior to the recent recession, because during the recession and in the years that immediately followed, manufacturers shifted from supplying exports to the United States to supplying Western Canada’s oil and gas sector.

Unifor highlighted the need to maintain diversity in the economy by maximizing value-added links between the manufacturing and the natural resource sectors. It stated that Canada should have invested more in petroleum refining over the last decade, when oil prices were higher and the oil and gas sector was more profitable. In particular, it noted that, since 2002, real GDP in petroleum refining has declined by more than 10.0% at the same time that oil and gas extraction has been rising.

According to Canadian Manufacturers & Exporters’ submission to the Committee, 76.0% of Canadian manufacturers are optimistic that lower oil prices – coupled with stronger U.S. demand for Canadian manufactured goods and a lower relative value for the Canadian dollar – will increase sales, profits and employment in Canada’s manufacturing sector in 2105. It also noted that Canadian manufacturing production is likely to grow by more than 5.0% from 2014 to 2015.

To ensure that Canada’s manufacturing sector benefits from lower oil prices and the depreciation in the value of the Canadian dollar, Canadian Manufacturers & Exporters identified the need for manufacturers in Canada – especially small- and medium-sized businesses – to remain globally competitive by adopting three measures: new production and process technologies; improved skills training; and better collaboration with universities and colleges to provide students with more practical experience. It stated that, at present, the potential cost savings for the manufacturing sector resulting from lower oil prices – and, thereby, reduced energy input costs – will not result in significant savings. That said, it indicated that some manufacturers will experience cost savings through lower input costs for plastics, petrochemicals and refined petroleum products.

Canadian Manufacturers & Exporters also said that, to date, the trucking and rail sectors have not passed their savings resulting from lower energy costs to customers in the form of lower prices. According to it, at least a portion of these cost savings are being reinvested to improve capacity and productivity, and to increase employment. It noted that recent reinvestments of profits by oil refineries to increase capacity and productivity partly explain the relatively greater decline in global oil prices than in retail gasoline prices.

In commenting on the effects of fluctuating exchange rates on capital investment in Canada’s manufacturing sector, Canadian Manufacturers & Exporters stated that companies with high inventory and material costs may not be able to increase their sales to the United States immediately when there is depreciation in the value of the Canadian dollar. It said that, over time, lower exchange rates may increase investment in the manufacturing sector as these companies begin to sell more to the United States and, thus, enhance their profitability.

Regarding the automotive sector, the Automotive Parts Manufacturers’ Association mentioned that – for most suppliers – about 50% to 65% of input costs are priced in U.S. dollars. That said, it noted that, during the recent period of higher Canada–U.S. exchange rates, a number of manufacturers began pricing their input costs in Canadian dollars to avoid risks resulting from exchange rate fluctuations; those manufacturers would not have benefited from the recent depreciation in the value of the Canadian dollar.

Moreover, the Automotive Parts Manufacturers' Association stated that the growth in North America’s automotive sector has occurred mainly in Mexico and the U.S. southeast. It highlighted that, for 55 Canadian automotive parts manufacturing companies that have established 110 production facilities in Mexico to service the growth in automotive manufacturing in that country, there is no input cost advantage to a lower Canada–U.S. exchange rate.

The Canadian Vehicle Manufacturers’ Association suggested that lower oil prices in the long term would have a mixed effect on Canada’s automotive sector in terms of consumer purchases and manufacturing operations. It noted that, in general, changes in production costs in the sector take time to affect a business’ outlook on its competitiveness, investment choices and decisions to pass on savings to consumers, as companies in this sector tend to make long-term commitments through business contracts with suppliers and transportation services. It mentioned, for example, that new vehicle sales in Canada in January 2015 were about 2.0% to 3.0% higher than they were in January 2014; this growth rate is about the same as what had been expected prior to the oil price declines that began in 2014.

As well, the Canadian Vehicle Manufacturers’ Association stated that, despite consistent sales and automobile production in Canada, the automotive sector is beginning to experience regional differences in sales; for example, in Alberta, new vehicle sales were lower in January 2015 than in January 2014, while overall sales in Canada continued to increase. It also noted that, although reduced demand is expected in the longer term, lower oil prices have recently strengthened the sales of trucks and crossover utility vehicles in North America. It suggested that, more generally, production in Canada’s automotive sector should rise as a result of lower oil prices and changes in the Canada‒U.S. exchange rate, provided U.S. demand for automobiles continues to be high.

Regarding steel manufacturing, the Canadian Steel Producers Association commented that reduced capital spending in Canada’s energy sector will have a direct negative impact on the demand for steel products in this country. That said, it identified some net benefits in relation to input costs resulting from lower oil prices and changes in the Canada‒U.S. exchange rate, such as reduced transportation costs. It also stated that those that compete with Canada’s steel manufacturers are experiencing similar production cost changes through lower oil prices; consequently, to remain competitive internationally, Canadian steel producers must become more productive.

Moreover, the Canadian Steel Producers Association said that reduced capital spending in Canada’s energy sector will have a negative impact on the demand for steel products, including construction materials, fabricated structures, drilling equipment, processing plants, storage facilities, and pipelines and railcars to get Canadian oil and gas products to domestic and export markets.

Furthermore, the Canadian Steel Producers Association mentioned that, over the last decade and largely because of overcapacity in China and elsewhere, rather than investing in new North American steel plants, manufacturers decided to make productivity improvements by investing in new technologies, including environmental technologies.

To address environmental concerns, the Canadian Steel Producers Association highlighted that Canada’s steel manufacturing sector is investing in technologies and equipment to comply with a range of environmental requirements, mainly provincial greenhouse gas emission regulations. It stated that, relative to other countries that have less stringent environmental regulations and enforcement protocols, Canadian steel production is more environmentally sustainable in the long term.

As well, the Canadian Steel Producers Association indicated that a January 2015 determination by the Canadian International Trade Tribunal to establish anti-dumping duties may assist in making the price of concrete reinforcing bar, or steel rebar, more affordable in the British Columbia housing sector; the duties will be applied on China, South Korea and Turkey.

Regarding forest products manufacturing, the Forest Products Association of Canada said that lower oil prices led to increased production in Canada’s forest products sector in the short term because of reduced manufacturing costs and a lower Canada‒U.S. exchange rate that supported exports to an expanding U.S. economy. It suggested that the value of forest product exports has grown by about 10.0% over the last year, and that longer-term growth is expected for a number of products, such as pulp, lumber, tissue and bio-products. That said, it noted that, although Canada outperforms the United States in terms of sawmill production and is the largest exporter of forestry products to countries such as China, continued investments in value-added transformation, innovation and sustainable production are required in order to remain globally competitive. In particular, it mentioned that its goal is to add $20 billion to its current annual productive capacity of $57 billion.

E. The Housing Market

1. Background

A January 2015 report by the Bank of Canada predicted that, because of lower global oil prices, Canada’s housing market will be weaker in 2015 than it was in 2014. In its view, lower demand for labour in oil-producing provinces will tend to slow or reverse recent migration patterns. In particular, it suggested that ongoing shifts in migration patterns in 2015 resulting from lower oil and gas production in Western Canada are likely to reinforce reduced demand for housing in those provinces.

Forecasts of the impact of the decline in oil prices on the housing market vary, depending on the assumptions made by various organizations. For example, a February 2015 report by the Conference Board of Canada suggested that the oversupply in some cities’ condominium markets and the decline in oil prices will result in a 9.1% decline in total new housing starts across Canada, with such starts falling from 189,400 units in 2014 to 171,670 units in 2015. In its estimation, oil prices will average US$56 per barrel in 2015.

A recent report by Canada Mortgage and Housing Corporation (CMHC), which assumed an oil price of US$60 per barrel in 2015, predicted a smaller decrease in new housing starts than did the Conference Board of Canada. As shown in Table 1, CMHC expected that new housing starts in Canada will decline by 1.0% between 2014 and 2015 as a result of reduced starts in Alberta, Saskatchewan, and Newfoundland and Labrador; increased starts are expected in Ontario.

Unlike the forecasts by the Conference Board of Canada and CMHC, a February 2015 TD Economics report predicted that oil prices will decline to below US$50 per barrel in early 2015 before rising to about US$65 per barrel in 2016. In its view, and as shown in Table 1, total new housing starts – on average across Canada – will decline by 6.3% from 2014 to 2015; larger-than-average reductions are expected in Alberta, Saskatchewan and Manitoba. It also predicted that Ontario will have a reduction in year-over-year housing starts in 2015, although housing starts in Toronto are predicted to grow by 0.5%. Finally, it expected the Atlantic Provinces, other than Newfoundland and Labrador, to have more housing starts in 2015 than in 2014.

Table 1 – Forecasts of New and Resale Home Sales and Average Resale Home Prices, Canada and by Province (% change from 2014 to 2015)

Province	Canada Mortgage and Housing Corporation			TD Economics
	Sales		Average Resale Price	Sales		Average Resale Price
	New	Resale		New	Resale
Newfoundland and Labrador	-8.0	-4.9	+2.2	-2.0	-5.3	-5.6
Prince Edward Island	-7.0	-9.4	-1.5	+6.6	-6.5	-0.1
Nova Scotia	+1.4	-4.8	+0.4	+24.4	+4.2	-0.7
New Brunswick	-8.8	-4.4	-0.5	+30.7	-0.6	-0.8
Quebec	-0.8	+2.7	+1.9	-3.5	+5.9	-0.1
Ontario	+6.9	+1.8	+2.2	-1.8	+2.4	+3.0
Manitoba	+1.3	+1.6	+2.3	-20.9	-3.1	-1.9
Saskatchewan	-11.6	-1.9	+1.4	-11.2	-6.7	-3.0
Alberta	-11.3	-0.9	+1.6	-17.4	-30.6	-5.1
British Columbia	-0.2	-5.8	+1.6	-6.0	+5.9	+3.1
Total	-1.0	-0.2	+1.5	-6.3	-2.0	+1.5

Sources: Table prepared using information obtained from: Canada Mortgage and Housing Corporation, Housing Market Outlook, First Quarter 2015; and TD Economics, Regional Housing Report, 12 February 2015.

Both the CMHC report and the TD Economics report indicated that, although housing tends to be overpriced at the national level, supply and demand in relation to new and resale homes will continue to be relatively balanced and broadly consistent with such indicators as employment, personal disposable income, mortgage rates and population growth. In particular, along with a reallocation of economic activity toward provinces that do not produce oil, TD Economics expected more balanced supply and demand conditions for housing in cities such as Toronto, Calgary, Edmonton and Winnipeg, and reduced pressures on housing demand and pricing in Ottawa, Montreal, Quebec City, Regina and Saskatoon. As well, CMHC predicted that, despite gains in employment and earnings in major urban centres in provinces that do not produce oil, increases in home prices will limit home buying activity and affordability in those regions.

2. Witnesses’ Views

Witnesses commented on the impact of lower oil prices on the housing market. In its submission to the Committee, the Canadian Association of Accredited Mortgage Professionals said that the net impact of lower oil prices on the housing market will be negligible, and that the impacts will primarily reflect changes in three factors: job creation; consumer confidence; and mortgage interest rates. As well, it provided a provincial perspective, noting that: in three provinces – Alberta, Saskatchewan, and Newfoundland and Labrador – the negative consequences of job losses will not be offset by low interest rates; job growth and low interest rates will increase housing sales in Ontario, Quebec, Manitoba, Nova Scotia, New Brunswick and Prince Edward Island; and the outlook is about neutral for British Columbia. Moreover, it indicated that, as reductions in mortgage interest rates as a result of falling oil prices have only been moderate, only a modest impact on the housing market should be expected.

The Regional Municipality of Wood Buffalo stated that, although it tends to have significant difficulty in securing sufficient land to keep pace with economic growth, it was able – in 2014 – to secure new land that will be used to increase the supply of housing. It mentioned that houses in the region continue to be relatively expensive, as the average price of a single detached home exceeds $700,000; that said, housing price pressures may be reduced as layoffs in the oil sector continue to occur and more people list their homes for sale.

F. The Labour Market

1. Background

According to February 2015 remarks by the Bank of Canada’s Senior Deputy Governor, in 2014, growth in industrial production exceeded its historical average as a result of higher labour productivity, rather than increased employment. In particular, it noted that monthly net job creation was about 10,000 in 2014, a figure that is about 3,500 lower than what would be consistent with labour market growth for an economy that is operating at full capacity.

When comparing the Bank of Canada’s Labour Market Indicator (LMI) – which is a composite indicator that includes the official unemployment rate and other measures of labour market activity – to Statistics Canada’s unemployment rate, estimates of changes in the unemployment rate may have overstated the extent of improvement in the labour market in recent years. For example, while the unemployment rate decreased from 8.3% in 2009 to 6.9% in 2014, the LMI remained relatively unchanged, falling from 7.8% to 7.4% over that period. A January 2015 report by the Bank of Canada explained that several factors are keeping this broader measure of labour market “slack” above the level of the unemployment rate, including long-term unemployment that is still close to its pre‑recession peak of 21 weeks, persistently low average hours worked, and a high proportion of involuntary part-time workers who would have preferred full-time work.

In commenting on other indicators of ongoing weakness in the labour market, a January 2015 report by the Bank of Canada noted that some youth aged 15 to 24 years and some prime-age workers aged 25 to 54 years have left the labour market. As well, it suggested that wage increases have moderated recently, with inflationary pressures reduced by an increase in labour productivity during 2014.

Although the Bank of Canada’s January 2015 report indicated that, on average, there continues to be excess supply in the labour market, the state of the labour market differs across provinces. As shown in Figure 8, unemployment rates are the lowest in the provinces west of Ontario, especially in Alberta and Saskatchewan, as provinces with abundant natural resource endowments – especially oil and gas – have continued to have higher-than-average demand for labour since the 2008–2009 recession. According to a February 2015 report by the Conference Board of Canada, as the economic impacts of oil price declines continue to occur, unemployment rates in 2015 are expected to be higher than in 2014 in those provinces with significant oil reserves, and to be lower in the remaining provinces.

Figure 8 – Unemployment Rates, by Province, 2009, 2014 and 2015 (%)

Sources: Figure prepared using information obtained from: Statistics Canada, Table 282-0002, “Labour force survey estimates (LFS), by sex and detailed age group, annual,” CANSIM (database; 2009 and 2014); and Conference Board of Canada, Provincial Outlook Executive Summary: Winter 2015 (forecast for 2015).

According to February 2015 remarks by the Bank of Canada’s Senior Deputy Governor, nearly one third of the goods and services purchased by Alberta’s energy sector are sourced from other provinces, including the labour services of interprovincial migrant workers. It, as well as a January 2015 Conference Board of Canada report, predicted that workers will be reallocated across sectors and regions if lower oil prices persist throughout 2015; industrial production is expected to shift away from the energy sector in Western Canada toward non-energy sectors in Eastern Canada. In particular, the Conference Board of Canada’s report stated that reduced construction employment in Alberta will have an impact on the Atlantic Provinces, as “fly-in, fly-out” Atlantic Canadian workers earned about $375 million in 2014.

The Conference Board of Canada’s January 2015 report also found that the depreciation in the value of the Canadian dollar and an increase in Canadian exports are expected to increase economic activity in non-oil and gas producing provinces, albeit to varying degrees; increases in economic activity are predicted to occur mainly in Ontario, Quebec and Prince Edward Island. That said, it suggested that reduced economic activity in oil and gas-producing provinces may not be immediately and/or fully offset by increased economic activity in the non-oil and gas producing provinces. In relation to Ontario’s manufacturing sector, for example, it expected that production in the automotive and automotive parts sector will increase gradually as the province makes investments designed to build industrial capacity.

In Canada, a reallocation of production from west to east may be limited due to ongoing interprovincial/interterritorial barriers to labour mobility, including differences in occupational standards and certification requirements in regulated occupations, as well as relocation costs.

2. Witnesses’ Views

Witnesses mentioned the effects of lower oil prices on employment, by sector and across provinces. Canadian Manufacturers & Exporters and Unifor commented that the decline in oil prices will have little net impact on national employment, as employment across Canada will increase in the non-oil and gas sectors that will benefit from lower oil prices, stronger consumer spending, a reduced Canada‒U.S. exchange rate and increased economic activity in the United States. Canadian Manufacturers & Exporters, the Canadian Steel Producers Association and Unifor suggested that lower oil prices will lead to immediate job losses in sectors across Canada that employ workers in oil exploration and oil drilling, and in jobs in construction and retail trade that serve the oil and gas sector.

The Alberta Federation of Labour noted that job reductions in the oil drilling and oil field services sectors will occur as lower global oil prices reduce capital investment and, thus, the sector’s workforce. Suncor Energy Inc. said that it is reducing its workforce by 1,000 individuals.

As well, the Alberta Federation of Labour stated that employment in certain subsectors of the oil and gas sector – such as downstream value-added production that includes upgraders, refiners and petrochemicals – will not be affected by lower oil prices. In its view, lower oil prices and a weaker labour market make it easier to develop value-added projects, such as upgraders. It also said that the maintenance of oil facilities has led to more stable employment for individuals in construction, and it indicated that jobs for the construction of upgraders and refiners are more long-term due to infrastructure maintenance.

Canadian Manufacturers & Exporters commented that, although the restructuring in the Canadian manufacturing sector that occurred from 2002 to 2012 resulted in increased innovation, greater investments in technology, and more effectiveness and efficiency in production processes, this restructuring process was challenging for businesses; 20,000 manufacturing operations closed and 600,000 manufacturing jobs were lost. The Canadian Vehicle Manufacturers’ Association noted that the automotive sector accounted for about 40,000 of those lost jobs.

The Forest Products Association of Canada said that, partly due to falling oil prices, employers in the forest products sector have hired 8,000 workers since 2013; their goal is to create 60,000 new jobs by 2020.

The Regional Municipality of Wood Buffalo stated that the temporary foreign worker program plays a valuable role in addressing a shortage of local individuals who are willing and able to work in the hospitality and retail sectors. It also identified two particular challenges in the social, community and economic integration of temporary foreign workers: the difference in wages between foreign and domestic workers, and the higher cost of living in that region.

Canadian Manufacturers & Exporters suggested that, to some extent, it is becoming easier to find people with skilled trades training; the lack of skilled trades workers has accounted for most of the constraint on growth in Canada’s manufacturing sector. In its view, there will continue to be excess demand for skilled trades workers in various sectors and regions across the country, particularly in the manufacturing sector in Eastern Canada.

Wade Locke highlighted that 4.0% of Newfoundland and Labrador’s labour force is employed in the province’s oil and gas sector, while 4.0% to 5.0% of the province’s population moved to Alberta to work in the oil and gas sector. He suggested that layoffs in Alberta will have an immediate impact on Newfoundland and Labrador’s economy, as well as on the province’s revenues.