Forecasting is difficult, especially about the future

What would you say is the big wild card in the global economic outlook for 2015?  I'd say it's almost certainly the price of oil, which has declined precipitously in recent weeks and may still have further to go.  Given the importance of oil to both businesses and consumers, the net impact on the global economy must surely be positive, but there will be some big winners and losers, and prospects for a wide range of companies and industries look very different from what seemed likely just a few months ago.

Have pity, then, on The Economist, which just published its glossy "The World in 2015" forecast issue.  An undertaking of this size inevitably involves long lead times, and unfortunately for The Economist, everything changed while the magazine was at the printers'.  There are throwaway references to oil scattered throughout, but the only article specifically on the industry consists of a few short paragraphs....at the bottom of page 144!  They'd surely do things quite differently if they had it to do all over again.

One country where the rapidly-changing oil price outlook poses a particular challenge for policymakers is Canada.  On Wednesday, Bank of Canada Governor Stephen Poloz announced that the Bank would keep its benchmark rate at 1% for the time being, even as he acknowledged signs that the recovery in the economy is "broadening".  He identified the uncertainty over oil prices, together with (no surprise here) high household debt levels as key risk factors in the outlook.

The problem, from Poloz's point of view, is that the impact of falling energy prices differs widely in different parts of the country.  It's obviously negative for the oil-producing provinces, notably Alberta, Saskatchewan and Newfoundland/Labrador.  As relatively high-cost producers (from tar sands in Alberta: from the seabed in Newfoundland), Canada's oil producers will become vulnerable sooner than most.  But it's obviously very positive for energy-consuming provinces, which include the three most populous, Ontario, Quebec and BC.  Consumers in those provinces will feel more prosperous; energy input costs for what remains of the manufacturing sector are set to fall sharply; and the fall in the exchange rate of the Canadian dollar is already making non-oil exports more competitive in the US market.

For Canada as a whole, as for the world economy, the net impact of lower oil prices, if they persist, will be positive, but that won't make the Bank of Canada's job any easier in 2015.  Whenever economic prospects for the various regions of the country start to diverge sharply, as they seem set to do, there are anguished calls for the Bank to adopt some kind of "regional monetary policy".  Nobody is ever able to define quite what that might entail, but those cries will surely be heard ever more loudly in the months ahead.  Gov Poloz is a lot less chippy in dealing with critics than his predecessor, Mark Carney, ever was, but his equanimity may soon be sorely tested.