Thank you, and good morning, Mr. Chair, and honourable members. On behalf of the Bank of Canada I'd like to thank you for this opportunity to share our analysis on the impact of global oil prices both on the Canadian economy in general and on the manufacturing sector in particular.
I should mention that our analysis is at the level of the economy as a whole. The rapid fall in oil prices is going to have both positive and negative effects on different sectors of the Canadian economy. To assess the overall impact, we used a modelling tool that we built to take account of the various channels and spillovers across sectors. We also drew on numerous surveys and meetings with firms and business associations. The bottom line is that a sizeable decline in oil prices since June 2014 is unambiguously negative for the Canadian economy as outlined in our January monetary policy report. Most of the negative effects will appear in the first half of this year.
The energy price decline will reduce aggregate income. Even though real GDP grew in the fourth quarter of 2014 by 2.4%, the real incomes of Canadians contracted. This occurred because the world price of an important Canadian export declined, and that means the loss of purchasing power for Canadians. In addition to this negative terms of trade effect, business investment is expected to be weaker. Business investment in the oil and gas sector, which is roughly a third of total business investment, is anticipated to fall by about 30% in 2015, but the effects of the oil price shock will be felt across the country.
The main transmission channels are the aggregate income effect that works through lost purchasing power and supply chain effects that work through interprovincial trade. For example, nearly one-third of the goods and services purchased by Alberta's oil sands industry are drawn from other provinces.
There are some positive but partial offsets. While Canadians are worse off than the aggregate, cheaper oil means more money in the pockets of individual consumers. They can either spend the additional disposable income or save it, and these decisions will matter for economic growth. Lower costs for firms that use oil as an input may lead to a rise in profits, output, and investment in non-oil related sectors of the economy.
It's also important to keep in mind that today's lower oil prices are mainly the result of abundant global supply as my colleague deputy governor Tim Lane pointed out in a recent speech. This supply-driven decline in oil prices is stimulating economic activity in the United States, our main trading partner. This will support Canadian exports if the export sector responds in line with historical experience.
Lower oil prices will have an impact on Canada through another channel. We are not net oil exporters and the value of the Canadian dollar tends to move with the price of oil. From 2002 to 2008, oil prices and the dollar were both on a general upward trend. You may recall that in 2008, when oil was trading at well over $100 per barrel, the Canadian dollar was almost at parity with the U.S. dollar. Today we're much lower and our dollar is at about 80ยข against the U.S. dollar. The lower dollar is improving the competitiveness of production in Canada, which should further boost exports and eventually investment. As we noted in our January monetary policy report, the manufacturing sector is expected to benefit from stronger U.S. demand, lower shipping costs, and the weaker Canadian dollar.
As we assess the ability of Canada's manufacturing sector to benefit from cheaper oil and the lower dollar, we have to recall where we're coming from. In Canada, competitiveness challenges and a prolonged period of weak U.S. demand forced many of our non-energy exporters to discard unneeded capital and eliminate jobs, or to close their doors for good. Rebuilding the lost productive capacity won't happen overnight. The bank has long been saying that in order for us to return to sustainable growth, we need a rotation of demand toward exports and business investment. Growth in our non-energy exports is showing more momentum in recent quarters, suggesting that rotation is indeed happening.
Finally let me note that our most recent business outlook survey indicated that hiring intentions and investment plans were robust for manufacturers. A majority of firms reported that they were planning investment projects aimed at increasing production. Overall, these are positive signs that the rebuilding process is under way.
This concludes my opening remarks, and I look forward to the discussion.