Good afternoon, Mr. Chairman, honourable members.
My name is Nick Leswick, I am the assistant deputy minister of the economic and fiscal policy branch at the Department of Finance with overall responsibility for economic and fiscal forecasting and the production of the federal budget.
As requested by the committee, in my opening remarks this afternoon, I will briefly speak about recent economic developments in Canada as a background to your overall theme of productivity and competitiveness that you'll be exploring through the course of your pre-budget consultations.
From the beginning of 2015 until mid-2016, Canadian economic developments were dominated by the large, rapid, and sustained drop in global crude oil prices. Those prices, measured in West Texas Intermediate U.S. dollars per barrel, fell from over $100 in late 2014 to lows of under $30 in early 2016.
The impact of this drop on Canada's economy was significant. The dollar value of Canadian oil exports fell by nearly $70 billion. This was a significant hit to national income, equivalent to about 3.5% of national GDP.
As a result, investment in the oil sector plummeted, falling by an estimated 60% or more than $50 billion. Along with it, employment in oil-producing provinces, particularly Alberta, but also Saskatchewan and Newfoundland and Labrador, fell by a combined 150,000 jobs. While these three provinces bore the brunt of the shock, its impacts were felt across the country. Real GDP in Canada contracted during the first and second quarters of 2015, and for that year as a whole, expanded by less than 1%.
Since mid-2016 however, economic developments have turned around markedly. Real GDP has expanded by an average rate of 3.7% per quarter for the last four quarters. Alongside this much stronger output growth has come very strong employment growth. It is estimated that employment has risen by over 350,000 jobs since mid-2016, and the unemployment rate has fallen from about 7% to just above 6% over the same period.
What caused this turnaround? Several factors have been at play.
First and probably most importantly, has been the stabilization and rebound in economic activity in energy-producing provinces, particularly Alberta.
This has been facilitated by the bottoming out, rise, and evident stabilization of oil prices at somewhere between $45 and $53 U.S. per barrel since the beginning of February last year.
The pick-up also reflects the fact that cuts to investment have largely run their course; during the first quarter of this year, oil sector investment was up on a year-over-year basis for the first time since the end of 2014. It was up again compared to the same period last year in the second quarter of 2017.
A stabilization in investment has also meant a stabilization in the job cuts associated with that investment. The fall in employment in Alberta, for example, halted in mid-2016, and job levels in the province have shown slow but steady gains since then.
The Canadian dollar has also depreciated relative to its U.S. counterpart over this period. The dollar averaged about 90 cents in U.S. dollar terms in late 2014 before falling to just over 70 cents in early 2016. This depreciation has provided important support to our export sector.
Altogether, these developments are what has been described as the slow and complex adjustment to lower oil prices. This simply means the reallocation of labour and capital to other areas of the economy, facilitated by monetary policy, fiscal policy, and a flexible exchange rate. For the large part, and at the macro level, these adjustments appear to be over. However, on a more individual level, there are certainly families, communities, and firms that continue to feel the impacts of the oil price decline.
Beyond the stabilization in the energy sector, a number of other factors have helped to affect the sharp turnaround in Canada's economic performance.
We have seen very robust housing market activity over the last year in Vancouver, Toronto, and surrounding regions. This has helped to support regional and national GDP growth.
Also, there has been a stabilization and pick-up in the global economy. The U.S. economy is meeting expectations. Conditions in the Eurozone have also firmed, as has growth in China. This more positive global environment has undoubtedly helped to support our exports, but equally importantly, business confidence and prospects about future sales.
The expectation of future sales growth, both domestic and abroad, is encouraging firms to invest in productive capacity to meet this increased demand. This can be seen in survey data on business expectations, as well as actual data on investment spending. While not strong yet, investment in Canada has shown signs over the last two quarters of responding positively to these domestic and international developments.
Monetary policy in Canada has also been providing, to use the specific words of the Bank of Canada, considerable stimulus. As well, in conjunction with monetary policy, a number of fiscal measures have been introduced by the federal government over the last two years, which have helped to support income growth and general economic growth. These include middle-class tax cuts, incremental infrastructure spending, and the enhanced Canada child benefit.
Combined, all of these factors are resulting in stronger and more broad-based economic growth across the country. For example, the unemployment rate in the province of Quebec is at its lowest level since 1976. Ontario has posted its longest back-to-back stretch of 2% or above real GDP growth since the mid-1980s, and in British Columbia the economy has created almost 150,000 new jobs since the beginning of last year.
This is all very positive and good news. Stronger, broader-based growth means that more solid economic momentum will likely continue over the coming quarters. Higher growth has generated higher employment and income gains, which have led to higher demand and thus higher output growth and so on, in a so-called virtuous circle.
However, the very strong rates of growth that we have seen over the last four quarters are highly unlikely to continue. There are a number of structural reasons for this. The bounceback in the energy-producing regions is just that, a bounceback. Growth rates will eventually plateau and ease. As well, we have seen a notable cooling in the Toronto and Golden Horseshoe housing markets recently. This will also take some strength out of recent GDP growth rates. The Canadian economy still also faces uncertainty relating to policy developments and direction in the United States.
Over the medium term, we also face a number of well-known structural challenges. These include demographic pressures brought on by population aging and, more specific to today's session, a relatively weak productivity performance in Canada.
On that, I hope both my colleagues from Finance Canada and my colleagues from ISED and ESDC will be able to respond to your questions. Thank you for the opportunity to make the opening remarks.