Canadian Lenders Feel Sting of Low Oil Prices and Slow-Growth Economy

February 26, 2016Canadaby EW News Desk Team

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Canada’s major banks, such as Toronto Dominion Bank and Royal Bank of Canada, failed to meet profit targets as the economy struggles, according to Reuters. Banks have been especially hit hard from energy loans, but banking leaders are more concerned about the overall slowdown of the economy. While the situation concerns many banks, analysts do not foresee an apocalyptic scenario.

Rich and poor commodity-driven nations alike are suffering from the oil market slump, and Canada is no exception. Canadian banks remain in a strong position, but the financial cracks cannot be ignored as the dour state of the economy degrades corporate and consumer lending, and loan setbacks could double if the economic downfall grows worse.

Officials are left with few good options as no sign of relief appears on the horizon, and despite Canada’s diversification strategies, the economy remains overly reliant on the oil sector. Oil-producing Alberta faces its worse budget setback in 25 years, and oil prices show no sign of increasing in the future, declining over 40% in the past two years.

The previous conservative government relied too much on the energy sector to secure growth, and central bank head, Stephen Poloz, recently said that he is looking to exports outside of energy to help offset oil shortfalls. Moreover, Poloz maintains that business activity and exports should be the primary factors steering the economy in the right direction.

The government expects energy investments to decline by 22%, including a 1.1% shrink in GDP for 2016, and officials project that unemployment levels will rise from 6.0% to 7.4% for the same year.

A great deal of Canada’s destiny lies beyond its borders as success hinges on U.S. growth, higher oil prices, and the state of the world economy. With that, Canada’s new liberal government plans to commence more infrastructure projects to spur growth, and stimulus spending in the private sector could bolster the currency and keep further interest rate cuts at bay, notes Reuters.

Stimulus will be a crucial part of Prime Minister Justin Trudeau's reform strategy, but the oil sector will remain vital under the leftist government. Infrastructure investments, however, may not be enough in the long run as other sectors of the economy falter, especially in a low-priced oil market and a climate of waning exports.

Moreover, numerous economists do not intend to revise growth forecasts until infrastructure projects prove effective. The problem is more complex than liberal vs. conservative policies, but Poloz and some strategists believe stimulus spending could work if conducted in the right manner.