Falling Oil Prices Hurt Canadian Economy

        OTTAWA–Canada's central bank cut interest rates for the second time in six months, highlighting how severely the oil-price collapse is crimping growth in one of the world's most energy-dependent advanced economies.
        The Bank of Canada l owered its benchmark overnight interest rate by .25 percentage points to 0.50% on Wednesday, citing a deeper-than-expected impact of the decline in oil prices and a sluggish recovery in non-energy exports.
        The move, which comes as the U.S. Federal Reserve is signaling its commitment to raising rates, is a sign of how lower commodity prices stand to reshape such resource-reliant economies from Canada to Norway and Russia. It also drives homes the risks for those economies of coming to rely too heavily on the resource sector for their economic growth.
        Bank of Canada Governor Stephen Poloz said that, based on the bank's projection, the economy shrank in the second quarter after a first quarter decline, marking two negative quarters of growth. He said he wouldn't refer to the downturn as a recession, because that will require more data, time and analysis.
        While the U.S. and most other Group of Seven countries stand to benefit from low oil prices because they consume more energy than they sell, Canada is a net energy exporter and relies heavily on the sector, which makes up about 10% of its GDP.
        Uncertainty in Greece and slowing economic growth in China have dragged down prices for everything from oil and coal to iron ore and gold. Oil prices, roughly half of what they were last year, are set to fall even further following this week's deal to lift sanctions on Iran.
        The declines have sent ripples through economies that depend heavily on natural resources.
        In Norway, where petroleum exports contributed more than 14% of real GDP last year, economists say tumbling oil prices have damaged consumer confidence and hurt the country's manufacturing sector. The World Bank has projected Russia's energy-dependent economy will contract this year because of low oil prices and international sanctions.
        The Canadian central bank said plunging business investment and weak exports led it to lower its growth outlook to 1.1% for the full year from the previous forecast of 1.9% expansion.
        Canada also fared poorly in the International Monetary Fund's latest global economic outlook, released last week. The IMF cut its Canadian growth forecast to 1.5% for 2015, down from 2.2% in April–the largest drop in forecast growth for an advanced economy.
        A prolonged slowdown and the prospect that Canada's economy may be in a recession–could pose a re-election challenge for Prime Minister Stephen Harper, with a federal election expected this fall.
        Wednesday's rate announcement, which sent the loonie close to levels last seen during the 2009 financial crisis, marks the second time the Bank of Canada has cut its key interest rate this year. The bank surprised markets in January with a quarter-percentage-point cut to 0.75%, which it called "insurance" against falling oil prices.
        Explaining the earlier rate cut last month, Mr. Poloz said the bank's primary mission was achieving its inflation target. "If the doctor says you need surgery to avoid death, the side effects usually don't deter you, you just go ahead and manage them somehow," he said during a panel discussion at a Bank of International Settlements meeting on June 28.
        The decision to cut again was fueled, in part, by weak performance in Canada's non-energy exports during the second quarter. Data from recent months has shown a decline in a number of exports, including forestry, mineral ores and pharmaceutical products. The bank called that trend "puzzling" but said on Wednesday that it expects to see a partial recovery in exports during the second half of the year.
        A pickup in non-energy exports remains "the most likely scenario," Royal Bank of Canada chief economist Craig Wright said recently, citing the weak Canadian dollar and recent growth in the U.S. "I think it is coming slower than what everybody had either expected or hoped for."
        Write to Kim Mackrael at kim.mackrael@wsj.com
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        (END) Dow Jones Newswires
        July 27, 2015 12:20 ET (16:20 GMT)

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