There's no question that Canada has benefited from the global commodity boom of the past two years but the phenomenal rally that has seen oil more than triple and gold hit new all-time highs has not provided nearly the economic boost to the country that similar booms of the past.
In fact, Canada's GDP growth is slightly lower in response to the recent boom due to a significant shift in commodities demand away from the United States to emerging markets like China and a Canadian dollar that is more closely linked to resource prices than ever before, says a new report from CIBC World Markets.
The report follows on a speech with a similar theme from Mark Carney, governor of the Bank of Canada, in May.
"We're blessed by our resource base, but when it comes to commodity price rallies, it's not clear that the more the merrier holds true for Canada these days," Avery Shenfeld, CIBC's chief economist said in the report co-written by Emanuella Enenajor.
The upward run in commodity prices is less likely to spur growth and get Canada to full employment largely because demand growth for commodities is now mostly found in emerging markets to which Canada has less direct ties, Shenfeld said.
Since the 1990s, key developing markets like Brazil, India and China have increased their combined consumption of refined copper, coal and nickel to now represent more than 40 per cent of total global consumption. Meanwhile the BRICs share of petroleum demand has increased close to 20 per cent.
As a result, a general rise in the Bank of Canada's commodity price index has tended to slightly lower the level of Canadian GDP over the period since 1995, excluding the recent recession, versus raising the level of real output by more than one per cent four quarters out previous to that.
"Historically, when resource prices were on a demand-driven upswing (as opposed to a supply shock as we saw in oil in 1973), a booming U.S. economy was part of that story, which meant good times for other Canadian exports," Shenfeld said.
"Not so today. Prices for copper, cotton, oil, gold and other globally traded resources all reached multi-year highs despite America's economy sporting a roughly five per cent output gap. Rather than booming, the U.S. is being held back by the mess in its housing market, and to some extent, by high oil prices that have acted as a tax on American consumers."
Those high oil prices have had the same effect in Canada, CIBC said, eating up a higher share of incomes and 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.
"Historically, Canada's commodity basket was well diversified, and included heavy weights for items like forest products that don't feature prominently in the CPI basket," Shenfeld said. "In recent decades, the energy, and particularly oil's share of the basket has grown, meaning that a rising Bank of Canada commodity price index has weighed more heavily on real consumer spending power than it might have in the past when industrial commodities had a greater weight."
In his speech in May, Carney made a similar point.
"(Since) only 10 per cent of Canada's exports go to emerging economies and our non-commodity export market share in the BRICs has been almost halved over the past decade, activity in Canada does not benefit to the same extent as in past commodity booms driven by U.S. growth," Carney said.
"The current situation is more akin to a supply shock for our dominant trading partner, with higher commodity prices acting as a net brake on growth. With oil prices up 50 per cent since last summer, the effect is material."
While the improvement in trade is generally positive for Canada, Shenfeld said that real trade volumes have been less so during the past decade. He said net trade from 2000 to 2007, when commodity prices climbed significantly, actually dragged growth in real terms lower.
"We earned more income from what we sold abroad, but we didn't sell more of it relative to the volume of imports, and that was during an expansion in which the U.S. was doing much better than it is today," he said.
A rising Canadian dollar also doesn't help, particularly given its stronger link to commodity prices. Shenfeld said the quarterly correlation between resource prices and the Canadian dollar has been near 100 per cent recently but before 1995 was negative. While that is good for workers, who benefit from greater global purchasing power, it has led to economic drag on nonresources exporters.
"The result of all of these forces is that commodity booms in prior decades were associated with less Canadian dollar appreciation, more U.S. growth, a healthier Canadian factory sector and even more response in our resource export volumes than the two booms since 2000," Shenfeld said.
