Predictions for a fast recovery from economic “oil shock” may have history on its side, but there are major differences this time around, said one bank economist, suggesting could come down before they go up.
“While history is on the BoC’s side in forecasting a fairly rapid rebound into the second half of this year and beyond, there are enough differences between today and those past shocks that may justify a more conservative posture toward the risks facing the outlook,” Derek Holt, ScotiaBank economist wrote in the bank’s latest global economic report. “That balance of risks continues to lean toward a base case for further rate cuts as the BoC’s policy bias changed markedly after January, but I do think that the BoC will be on a long pause.”
According to Holt, the Bank of Canada is forecasting a stronger rebound from the current oil shock than it did in 2008 and 1990 but slower than other oil price corrections.
However, there are certain factors that are unique to the current mini-crisis, including the state of the housing market.
“Today, however, there are some tailwinds like currency depreciation that has improved upon but not offset a long-term deterioration in the country’s cost competitiveness, and several headwinds against the outlook that were less prevalent in the past,” Holt wrote. “One headwind is a household sector that is currently at record high levels of activity and indebtedness by multiple yardsticks including the home ownership rate, real per capita consumer spending, renovation spending, debt-to-income, and an assortment of house price measures.”
As a result, Holt believes the central bank may implement an “extended pause” that may extend into next year.