Canada needs 5 years to adjust to commodities rout -central bank

OTTAWA, Jan 20 (Reuters) – Canada will adjust to lower commodity prices in three phases over the next five years, with the impact of lower incomes to be felt more strongly later on and economic growth by 2020 being 2 percent lower than it otherwise would have been, according to staff at the Bank of Canada.

Restructuring in the resource sector is the dominant factor in the first phase as collapsing profits prompt firms to curtail business investment and employment, a staff analytical note said.

That restructuring phase should peak in the middle of this year, then stay roughly constant. The impact of lower incomes will start to hurt domestic consumption, while the lower Canadian dollar will boost non-commodity exports.

When the economy reaches the last stage, equilibrium, it will be consistent with potential output that is 2 percent lower than the control case of if commodity prices had stayed at mid-2014 levels.

By then, the impact on growth rates will dissipate, but total exports are expected to be 0.2 percent below where they would have been without the drop in commodities.

The analysis used the assumption that commodity prices stay roughly flat over the timeline. It used data up to November 2015, so did not account for the most recent slide.

The analysis was released at the same time as the bank decided not to cut interest rates as concern about the rapid fall in the Canadian dollar clashed with an economic slump.

Recently elected Prime Minister Justin Trudeau on Wednesday told the World Economic Forum in Switzerland that Canada’s economy consisted of much more than natural resources, though he acknowledged the challenge of lower oil prices.

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