That's one of the main takeaways from a CIBC report that attempts to quantify the impact of plunging oil prices on many aspects of Canada's economy.
"The recent dive in crude oil prices is an unprecedented development for the Canadian economy," the report by CIBC economists Avery Shenfeld, Peter Buchanan and Warren Lovely says.- DON PITTIS: Face it — house prices could fall like oil is
- ANALYSIS: The winners and losers of cheap oil
There's a broad consensus that the declining price of oil is bad economic news for Canada, since the country has made major moves in the last decade or so to increase oil output and become a major global player in energy.
Last week, the Bank of Canada estimated that on the whole, suddenly cheaper oil will knock about a third of a percentage point off of Canada's GDP next year. But the CIBC report points out that gauging the impact of that decline is far more complex than simply measuring the impact on GDP.
Winners and losers
"The bottom line is that references to a few decimal places in real GDP miss the point," the bank says. "The value of what Canada sells to the world ... is what filters into wages and profits, government revenues and economic well-being."
It's clear that the impact isn't going to be felt evenly.
Some provinces are poised for tough times ahead, while others may ultimately see some benefits.
"The energy sector directly accounts for nearly 10 per cent of Canada's GDP, but in the oily corners of the country — Alberta, Saskatchewan, and Newfoundland and Labrador — that sector's weighting is closer to 25 to 30 per cent," the bank says.
A world where the price of oil is under $60 and dropping is an unquestioned negative for those places. But contrast those provinces with the rest of the country and cheap oil is not nearly as dire. Outside of those three, no other province relies on energy for more than four per cent of its GDP.
"Energy's share of Ontario's economy is a scant two per cent, and that province will actually benefit by a weaker Canadian dollar." CIBC says.
Slumping oil creates a virtuous cycle for those who like a cheap loonie, like many businesses and consumers in Central Canada. The bank reckons that oil's 40 per cent decline has already directly shaved about five per cent off the value of the loonie.
Cheap oil could also compel the Bank of Canada to put off rate hikes a little longer, something that would add to the loonie's weakness. All in all, the bank foresees a floor of about 81 cents for the Canadian dollar.
It's different this time
Cratering oil prices aren't new, but this decline is unlike previous ones because others were caused by a recession-related drop in demand. Of late, the price of oil has been dropping just because we have too much of it — much of the global economy is actually poised for growth, especially the suddenly strong U.S. economy that a lot of Canada stands to benefit from.
Add it all up and Ontario could be poised to lead the country in GDP growth next year, CIBC says, followed closely by B.C., Manitoba and Quebec, all of which are expected to grow by more than two per cent.
Topline growth in the form of the economy, which is measured in GDP, filters down into real money for Canadian people and businesses — and back up to governments in the form of taxes.
There's a hit to be had on that front too, the bank says.
Assuming an average price of $70 per barrel next year, the bank estimates that Canadian governments will lose out on between $10 billion and $13 billion worth of revenue next year.
"Of that, Ottawa's hit could be on the order of about $5 billion," CIBC says. That's not an insignificant amount of money, as it's bigger than some of the more optimistic forecasts of near-term budget surpluses that the federal government recently forecasted for next year.
If Ottawa's tax revenues come in lower than expected, that could change plans in a hurry. As CIBC puts it, cheap oil could "force some yet-to-be announced restraint on the spending side to pay for tax relief already unveiled."
Outside Ottawa, the provincial government in Edmonton is set to take the next biggest hit.
If oil averages $70 per barrel next year (and it's worth noting the banks' estimate of $70 per barrel is more than 20 per cent higher than where oil is currently trading), CIBC says Alberta can expect a hit of about $7 billion in lost revenue.
Saskatchewan, and Newfoundland and Labrador can expect smaller hits, something in the range of between $400 million and $700 million less per year. The impact on other provinces is hard to quantify as any decline in revenue from energy is likely to be at least partly offset by increases in everything else.
The bank even goes so far as to recommend that Alberta goes into deficit, at least temporarily, until oil revenues return.
"Today's concerning energy price backdrop won't last, as the world will ultimately need oil from Canada," CIBC says. "But ... there are regional and sectoral stories that will play out for at least a year if not longer, raising the stakes for policymakers and investors who had grown accustomed to good news from the oil patch."