Canada risks a case of ‘Dutch disease’ as commodities and the loonie soar
Photo by Bloomberg/Getty Images Article contentCanada provides the world with a bounty of natural resources from fossil fuels to metals to wood and crops. So a commodities rally is a good thing, right?
Well, it’s complicated.
“The market’s responses to a spike in resource prices, particularly if those resource price goodies don’t last, can sometimes turn what looks like a gift to Canada into a Pandora’s box,” say CIBC chief and senior economists Avery Shenfeld and Royce Mendes.
The economists argue that what we are seeing in the recent run hermes replica bands reddit
up in commodity prices is probably not a so called supercycle, last seen in the 2000s, fuelled by China’s massive industrialization.
Resource runs come and go, but mostly they don’t last long. This one, driven by a sudden surge in global activity, temporary supply bottlenecks and bullish investors, has all the marks of a temporary spike, they said.
So even if it lasts just a few years, what’s the catch?
“It’s that this temporary gift raises the risk that resource currency enthusiasm sends the Canadian dollar to levels that do damage to the country’s cost competitiveness in other sectors, particularly if that leads to a loss in the market share for new plants building the products of the future,” say Shenfeld and Mendes.
It’s called the “Dutch disease” and Canada has seen it before when oil prices have spiked. dollar terms, and puts productivity and competitiveness on a downward spiral. itself.
The economists stress that Canada is not just a “hewer of wood and drawer of water.” Only a minority of exports are resource based, even when including downstream processing.
Right now the world is eyeing long term opportunities in technology, particularly in the energy fields of carbon reduction and conservation. CIBC says decisions on where these production facilities will be built will be made in the next couple of years and labour costs, and thus Canada’s exchange rate, could be material.
Businesses making those decisions “might not appreciate that the exchange rate might only be temporarily elevated,” they said.
The Canadian dollar can be driven by resources in three ways, and right now all are in play, said CIBC.
The CIBC economists say the Fed’s dovish stand has helped the latter, but neither is the Bank of Canada offering much “verbal resistance” to the currency’s climb.
The best scenario, they say, is if Canada can reap the benefits of the resource rally, while containing the loonie’s rise. CIBC thinks this is still possible. It expects the Fed will surprise markets by tightening earlier than expected and predicts the Canadian dollar will be back at 76.9 US cents next year.
But the Bank of Canada needs to be part of that solution, they say. It should “underscore to FX markets that commodity price hikes could be short lived. Dial down the calming rhetoric that the loonie’s gains are in line with fundamentals, and instead, explicitly remind markets that as a drag on non resource exports and inflation, the C$ gains will push back the timetable for rate hikes in Canada.”.