Welcome to the April edition of the George Davis Report. This month, what I'd like to discuss is some of the changes that we've made to our forecasts based on the Iran war. This has become much more of a pressing theme over the last month or so, and we continue to get a lot of client questions around this theme, and so I thought it would be something that would be quite appropriate to address today.
So let's start off from a growth perspective. We haven't really made any major or significant changes to our growth forecasts due to the war, and really we looked at it from a multidimensional standpoint. Number one, from a trade perspective, higher oil prices would certainly be more positive for the Canadian economy because we're a net exporter of energy products, and so we'll be receiving higher prices for those energy products that we export. So for example, even if our oil exports are the same on a volume basis this year relative to last year, the fact that we'll be getting almost double in terms of price for that oil would certainly reflect more positively for our terms of trade.
Now, on the flip side of that, we don't expect higher oil prices to move the needle in terms of business investment, and we've got an interesting chart on the screen where you can see if you go back to 2014, business investment from the energy sector represented about 4% of GDP with oil prices close to $100 a barrel back then. Now, if you fast-forward to last year, business investment from the energy sector was only 1.4% of GDP, and if you look back into 2022, the last time oil prices spiked up towards $100 a barrel when we had the Russia-Ukraine conflict kick off, we basically saw oil and gas business investment only represent about 1.2% of GDP.
So the bottom line is the oil and gas, the energy sector, hasn't been getting too carried away when we see sharp spikes up in oil prices, because essentially, what's tended to happen is a year or two later, we've tended to get a very significant correction in oil prices, and so they don't want to get overenthusiastic in terms of business investment, and so as a result, we think that there's going to be more of a neutral impact there.
And then thirdly, when we look at it from the consumer standpoint, that's actually a little bit more of a negative impact, because we are paying more at the pump for gas every time we fill up our cars. So, we have less disposable income, less discretionary income to use and to spend, and so on balance, we basically think that the growth outlook is going to pretty much net out to be more of a neutral factor right now. Obviously, there will be some regional differences, with Western Canada benefiting a little bit more because of the energy angle, but by and large, when we look at it from an aggregate perspective, it’s not likely to have any major changes there.
Now, where we do see some changes, though, is in terms of our inflation forecasts. We've basically added about 0.2 percentage points to our inflation forecast for 2026, moving it to 2.4% from 2.2% previously in terms of headline inflation, and our core forecasts is unchanged at 2.2%.
Now, the main difference there is headline inflation will include the impact of higher energy prices, whereas core inflation is ex-food and energy. So, you can see that we've accounted for the higher oil prices in that respect in terms of the impact on the headline number itself. Now, when you look at that upward bias to headline inflation, perhaps that's going to serve as a bit of a headwind in terms of potential rate cuts from the Bank of Canada. With inflation moving further away from the Bank of Canada's 2% target, that potentially is going to constrain any potential hopes for interest rate cuts.
Essentially, that is basically what we have penciled into our Bank of Canada forecast right now. We are expecting the Bank of Canada to keep interest rates unchanged for the balance of this year as our base case forecast, and one of the things that our economics team did is they walked through various scenarios in terms of WTI crude oil prices and what the potential impact could be on inflation on a quarterly basis, and you see that exercise in the chart on your screen, and essentially when you distill it, we could see an upward shift of anywhere from a 0.1 to 0.8 percentage point contribution to inflation. an increased contribution to inflation, depending on which scenario you're looking at. So you see our base case scenario there. You also have one scenario with oil prices around $80 a barrel, and you have another scenario, a more severe scenario, with oil prices closer to $100 a barrel, and the potential add to inflation from that.
Now, in terms of our dollar/CAD forecasts, we haven't changed our forecast for dollar/CAD. We're still looking at 1.3700 mid-year going into June of this year, and we're looking for a decline to 1.3400 into the end of the year. We're still sticking with our broader thesis of US dollar weakness. One of the things we've tended to see in the markets is when we've gotten positive news around the Iran war, i.e., any talk of a potential ceasefire or anything of that nature, generally speaking, the market reaction has been to sell the US dollar on those types of headlines, and so we do think that over time, we will eventually come to a more concrete resolution on the war front, and when that time does come, we think the market is going to be able to become more bearish on the US dollar. In that respect, that should take the US dollar broadly lower, and that should take dollar/Canada broadly lower as well.
Now, in terms of our expected trading range in the month ahead, I think we're going to nudge it up a touch. We're going to go 1.3500/1.3600 on the lower end, 1.3900/1.4000 in terms of the upper boundary. Generally speaking, we did have a push towards the 1.3950 level in the month of March and April. We did see some selling pressure come into the market at that point, and we continue to expect that type of behavior to continue on moves towards the 1.3950 to 1.4000 area. We think that will provide a good opportunity for those of you that are US dollar sellers to step into the market and take advantage of any moves higher and use that as a selling opportunity in the context of our broader expectation that, as we get towards the end of the year, we'll see lower values for dollar/Canada.
So stay tuned for our next video update in the month of May, where we'll actually present a little bit more of a detailed outlook in terms of what we're looking at for the economy in the second half of the year, and how that translates into interest rate expectations and our expectations for the Canadian dollar as well.