Higher resource prices not so good for Canada

Rising commodity prices may not fuel the economic boom for Canada it once did, according to a report from CIBC World Markets Inc.

June 2, 2011   by PLANT STAFF

TORONTO: Rising commodity prices may not fuel the economic boom for Canada the way it once did, according to a report from CIBC World Markets Inc.

A CIBC analysis of the relationship between Canada’s commodity prices and US and Canadian GDP shows an upward shock in resource prices has actually lowered Canadian GDP since 1995 versus a 1% positive impact that occurred previously.

A number of factors explain this change. For example, a demand-driven upswing in the past was accompanied by a booming US economy, which was good for other non-resource Canadian exporters.

Today, as prices for globally traded resources reached multi-year highs, the US economy has been held back by a a struggling housing market, “and to some extent, by high oil prices that have acted as a tax on American consumers,” said Avery Shenfeld, chief economist at CIBC.

High oil prices also cut into Canadian incomes retail sales, and because oil’s share of Canada’s commodity basket has grown, these increases are having a greater effect on consumer spending than in the past.

The loonie adds another twist. Since 1995, its value has been more closely tied to commodity prices as investors look at the Canadan buck as an alternative to the devalued American dollar. This creates a drag on non-resource exporters, resulting in a “Dutch disease” effect that makes it harder to achieve full employment, Shenfeld said.

“The impact of the Dutch disease on Canada’s factory sector has meant that what were once trade surpluses in auto parts, rail equipment and other manufactured goods are now deficits, leaving commodities as the sole source of Canada’s trade surplus by the end of the last expansion, and making the currency even more tied to commodities.”

As a result, CIBC says the boost to growth from higher capital spending in the resource sector is partially dulled by the impact of the Canadian dollar on other exports, which has cost Canada about a quarter of its former share of nominal US imports, with Mexico picking up share over the same period.

“The result of all of these forces is that commodity booms in prior decades were associated with less Canadian dollar appreciation, more US growth, a healthier Canadian factory sector and even more response in our resource export volumes than the two booms since 2000,” said Shenfeld.

Click here for a copy of the report.

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