High Commodity Prices Bolstering Canadian Economy
High commodity prices are insulating the Canadian economy from the effects of the US slowdown, Oxford Analytica says.
Despite negative first quarter growth, surging wages in a low inflation environment are likely to bolster domestic consumption — despite slumping non-energy US exports — and allow economic expansion to resume.
The Canadian economy continues to be a story in contrasts, OxAn says. There has been a significant improvement in the terms of trade, which is boosting nominal income growth, but manufacturing output is contracting due to the strong Canadian dollar (’Loonie’) and slumping US market. As a result, real GDP growth slid into negative territory during the first quarter, after expanding at an annualised 0.8% pace during the fourth quarter and 2.3% during the third quarter of 2007.
The duality of the economy is apparent in the employment data, which evidences a starkly different outlook by sector and province:
- In April, the share of the population with a job was 63.8%, just 0.1% below the record high set in the first quarter.
- Since 2005, Ontario has lost 14% of its manufacturing employment while Quebec has lost 15%. Yet despite the loss over 300,000 manufacturing jobs, total employment increased 2.1% during the past year, slightly topping the pace of the prior five years.
The Ontario economy has been remarkably resilient in the face of manufacturing job losses. Provincial employment grew 2.2% during the past year, and the unemployment rate has dropped 0.3% from one year ago, to 6.3%. However, Ontario has been vulnerable to the contraction occurring among the big US automakers.
The stability of Canada’s non-tradable sectors suggests that the economy will remain resilient, and could experience output growth of 1.0% this year. However, there are several two downside risks, namely how the US downturn affects Canada’s export prices and terms of trade; and whether commodity markets remain resilient, driven by Chinese demand.
The persistent strength of commodities without futures contracts — such as iron ore, molybdenum, and potash — suggests that the commodity boom retains strong fundamental underpinnings.
If commodity prices remain robust, Canada’s nominal GDP expansion will continue to significantly exceed real GDP growth. If commodity prices finally break, the Canadian dollar will fall and manufacturing output will improve but equity prices will decline, nominal income growth will slow, and consumption will suffer.
Canada’s economy could prove surprisingly resilient, in the face of the US slump, as long as global commodity prices remain robust.
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