Oil spills into the broader economy.
Canada’s economy has split in two. The resource producing economy is deteriorating at a breath-taking pace, broadsided by collapsing commodity prices. For Canada, the most important commodity is crude oil.
West Texas Intermediate has plunged below $39 a barrel, not seen since the Financial Crisis, and Western Canadian Select to a catastrophic $25 (C$33.32) a barrel. Canadian tar-sands producers are particularly hard hit; they’re the globe’s high-cost producers. And the epicenter of this activity is the province of Alberta.
Then there’s the rest of the economy, which is trying not to wobble too visibly as its foundation is breaking up. It is very likely that Canada is in a “technical recession” – defined as two quarters of negative GDP growth. The first five months already outlined a shrinking economy, dragged down not only by the resource sector but also by other weak links [read… It Gets Ugly in Canada].
Now everyone is waiting for the June GDP numbers to be released. Canada is heading into a general election this fall, and the economy is front and center.
But new vehicles sales are still hanging in there. As in the US, the industry is powered by cheap and easy credit. It’s enabled by a frazzled Bank of Canada that keeps lowering the rates. Subprime customers are being aggressively courted by banks and alternative lenders that lust for the easy profits to be made on folks who think they don’t have a choice. And Wall Street makes a bundle repackaging these subprime auto loans into highly rated structured securities.
So new vehicles sales rose 0.4% in July from a strong July 2014, to 177,844 units, setting a new monthly record, for the seventh month in a row, according to the Canadian Auto Dealer. July sales were 14.8% above the past-five-year average. Year-to-date, sales rose by 2.4% over last year.
“In spite of the economic volatility both globally and here at home, Canadian auto sales continue to demonstrate resilience,” explained David Adams, president of the Global Automakers of Canada. “In the face of falling consumer confidence, Canadians still purchased vehicles in record numbers.”
There are a few cracks. The seasonally adjusted annualized sales rate (SAAR), an industry standard measure for auto sales in the US and Canada, had been declining in April, May, and June, and worrywarts were already counting their gray hairs. But then came July, with a SAAR of 1.98 million, which put auto sales back on track for a full-year record.
But in the oil patch, all heck has broken loose. Every economic index, from home sales in Calgary to business confidence, is heading south on a vertiginous slope. And consumers are getting the drift: this is going to get tough. And they slashed their new vehicle purchases.
Auto sales in Alberta muddled through during the first few months of the oil bust, when everyone still thought it was just a temporary blip. But real effects were seen in March, when new vehicles sales in Alberta fell -8.3% year-over-year, according to Statistics Canada; in April -8.2%; in May -13.7%. In June they plunged -17.6%, and in July -12.9%.
These are huge year-over-year declines.
Today, Stéfane Marion, Chief Economist & Strategist at NBF Economics and Strategy shed more light on this situation, with data just released by Desrosiers Automotive, juxtaposing new vehicle sales this year through July in the four largest provinces – British-Columbia, Quebec, Ontario, and Alberta. And this is what this oil-patch fiasco looks like:
This is how the collapse in commodity prices, Canada’s most important export product by far, spirals into the broader economy, whose other main engine of growth, the housing bubble – one of the most magnificent the world has ever seen – is teetering precariously at its tippy top, waiting for that puff of air to come along.
So the oil price collapse is bad, but this is worse. Read… Canada “Getting Clocked” by Something Far Bigger than Oil
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Tosh, Wolf. It’s different this time.
It gets worse for Alberta (where I was raised) The province just elected its first left of center NDP government. This would not automatically be a bad thing but the resumes of the new people are astounding. Not one as far as I have read has ever had to meet a business expense much less a payroll. A farmer in this crowd would be a captain of industry.
It gets worse. A number of the new team ( including the chief of staff) are career opponents of pipelines ( not just Keystone) without which Alberta’s oil is stranded- so this place may be the first in the world to elect a government opposed to the main industry.
I dunno — the PCs who governed for the past 44 years never diversified the economy effectively, nor did they develop a sustainable approach to budgeting. A Bloomberg report out just yesterday ranked Alberta along with some of the most dysfunctional countries in the world as failing to prepare for a downturn in oil prices. The new government may not include people with the resumes or willingness to service the oil patch, but that may not be a bad thing. Remember, the oil sands are actually a fairly recent industrial development — is it wise to base your provincial economy, and budget, on the world’s most expensive oil?
From my not so lofty position, this report spells serious trouble for Canada. The sheep are set up for the slaughter, election or no election. The trash of new vehicles are piling up all over. In our small town, 8500, there must be two hundred new vehicles sitting idle waiting for buyers. The Dodge dealer bought and developed the side lot just to keep adding to their inventory. The GM dealer, the lot is jammed, the Toyota dealer has a full lot. The used lots are adding as we speak from the auctions. Sales? Not here.
The people are broke! But, the night of the living dead lives on.