Economists are grappling with what the collapse in crude prices portends for the Canadian economy. The good news: While the oil price shock will pare the energy sector’s contribution to gross domestic product (GDP) growth, it’s unlikely to prompt a recession.

Lutz Kilian, a professor of economics at the University of Michigan and an expert on oil price shocks, says investors shouldn’t be driven by recent, fearful headlines. He told the Canadian Investment Review: “One key insight from recent research is that economists for years may have overestimated the impact of oil price shocks.”

He also said that it’s difficult to extrapolate from past shocks. No two are the same in what they’ve wrought, so “there is no mechanical relationship between the economy, financial markets and the price of oil.”

Of course, the slide in crude prices could affect the economy. But the economy has many factors that drive growth, and a setback in one area can be partially or fully offset by gains in other areas.

As U.S. investors, one of the key attractions of Canada’s investment story has been its abundance of resources. But while the country’s mining and energy sector are key parts of the economy, it’s important that we don’t blow them out of proportion. To put things in perspective, mining, quarrying and oil and gas extraction contributed 8.1% to Canada’s 2013 GDP, according to data from Statistics Canada.

The Rest of the Story

While that figure does offer some welcome relief, it doesn’t tell us the extent to which growth in this sector flows through to other areas. And that’s something that’s giving economists pause.

For instance, economists believe oil’s decline will have a deleterious effect on business investment, which is one area that the Bank of Canada (BoC) has been hoping to revive. By some estimates, the energy sector accounts for roughly one-third of non-residential investment in Canada.

The Wall Street Journal reported that at the Economic Club of Canada’s annual forecast breakfast last week BMO Capital Markets Chief Economist Doug Porter said he’s expecting a double-digit decline in that spending.

On the other hand, many economists tend to focus on the boost to consumer spending that can occur thanks to lower prices at the fuel pump. And with Canada’s economy still largely driven by spending from the country’s debt-burdened consumers, it will be helpful for them to have extra cash in their pockets.

Happy Consumers

Equally important, that increase in consumer purchasing power thanks to lower gas prices will extend to U.S. consumers. And with so much of Canada’s economic transition depending on a resurgent U.S. economy—even before crude’s fall—that’s good news.

After the first quarter’s disappointing contraction last year, U.S. GDP sharply accelerated, with impressive gains of 4.6% and 5.0% in the second and third quarter, respectively.

Based on a survey by Bloomberg, economists’ consensus forecast is for the U.S. economy to expand by 3% in 2015, a substantial seven-tenths of a percentage point better than projections for full-year 2014 (fourth-quarter numbers won’t be released until the end of January).

The U.S. buys roughly three-quarters of Canada’s exports, so a rise in export activity, particularly among manufacturers, has been at the top of the BoC’s wish list.

In the near term, however, lower commodity prices will lead to a decline in Canada’s terms of trade, and as the BoC bluntly put it in its recent semiannual Financial System Review, cause income, wealth and GDP to fall.

But again, there are other factors that will at least partially offset this effect, particularly a lower exchange rate. The BoC says that falling commodity prices will help push the Canadian dollar lower. In recent trading, the loonie dropped to USD0.843, its lowest level since the Global Financial Crisis.

If a lower exchange rate is indeed successful in spurring exports, then that could instill confidence in Canadian exporters to invest in future growth, thus restoring at least some of the flow of capital that will be lost as the energy sector cuts back on its investment.

Crude’s bear market could also be helpful to the broad economy in at least one other way: It buys the BoC more time to continue priming the economy with its monetary largesse.

Absent crude’s price shock, the central bank would have faced greater pressure to reverse its dovish stance on interest rates, given recent improvements in indicators that typically lead to monetary tightening, as CIBC’s economists observed.

Traders aren’t betting significantly on any change in Canada’s short-term rates until the end of the year, based on futures data aggregated by Bloomberg. And even then, a plurality still expect the central bank to hold its overnight rate at 1.0%, which is where it’s been since late 2010, the longest pause in the BoC’s history.

Given all these factors, where does that leave us? The consensus forecast is for Canada’s GDP to grow by 2.5% in 2015, a tenth of a percentage point better than projections for 2014.

And that’s also the level of growth which the BoC has previously identified as the minimum threshold for removing excess slack from the economy.

Not bad, not bad at all.