The past decade has been highly profitable for Canadians invested in resources—and let’s face it, that includes virtually every investor.
Massive economic growth in Asia has driven demand for Canadian commodities through the roof, as China in particular has few of the resources needed to sustain its development.
As prices for copper, coal, oil and potash repeatedly pushed into new record territory, profits for producers have risen sharply.
But there may be a limit to the upside for the Canadian economy, according to a new study by CIBC World Markets. In fact, higher commodity prices may be eroding our GDP growth.
The study found that since 1995 upward shocks to the price of a resource basket has reduced Canadian GDP.
Prior to 1995, rising commodity prices have meant a boom in the U.S. economy. The booming U.S. economy would keep the greenback strong against the Canadian dollar. Not only did resource companies benefit from selling to the U.S. but American buyers were also buying Canadian manufactured goods as well.
“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 five per cent output gap,” says Avery Shenfeld, chief economist at CIBC. “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.”
While Canadian oil companies have benefited from the higher price of crude, Canadian consumers have pulled back on their non-energy spending. Energy now makes up a larger percentage of the overall commodity price index, magnifying the impact of price increases.
The surging Canadian dollar also makes it harder for the country to reach full employment, mimicking the effect that North Sea natural gas discoveries had on the Netherlands.
“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,” Shenfeld explains.
“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.”