June/July 2009

Supply Side

Canada’s economic base is narrowing towards natural resources

By J. Baird

In the recent past, Canada’s economic performance was the envy of the world. We paid down debt despite cutting taxes, unemployment was low, and we had impressive trade and current account surpluses. Hidden in this, however, was the changing nature of our economic base, something that will likely continue in the next expansion, with implications for Canada’s currency, economic volatility and regional disparities.

Over the few months leading up to December 2008, our goods trade deficit crashed from monthly surpluses in the $5 billion range to a deficit. In January, we registered another nine per cent fall in exports (led by a large decline in automotive products), imports fell 7.9 per cent, and the monthly trade deficit widened to $993 million. In March 2009, Canadian exports fell but imports were off even more, resulting in an increase in the trade balance to a positive $1.1 billion. Until December, Canada had run trade surpluses for 33 consecutive years.

Certainly the speed of the decline relates to the current severe global recession. However, past recessions have not caused as large a swing in Canada’s trade position. While resource prices have fallen recently, the Bank of Canada’s commodity price index, when measured in Canadian dollars to line up with the trade data, is still at lofty levels relative to its level during the 1998 Asian crisis or the 2001 U.S. recession — periods in which Canada maintained a trade surplus.

A decade ago, a number of sectors contributed to our trade surplus, including automobiles, rail cars, ships and furniture. By 2008, these were all in deficit, and trade deficits in other products like clothing had widened materially. So, while the annual trade surplus was still very impressive last year, it rested solely on the ability of huge revenues from energy, minerals, metals and other commodities to cover the costs of importing just about everything else.

Predictions are that a weak currency will not save our manufacturing sector. Even though recently our dollar is off 20 per cent compared to the U.S. dollar, it will likely recover once commodity prices rise again. Always correlated to commodity prices, the new, higher dependency on resources will cause our currency to rise ever more quickly once demand for commodities returns.

Commodity prices are cyclical. This recession will not create any new supply for metals or oil. Indeed, reduced exploration and development spending will deplete supply projections for the first few years of the next economic recovery. So, we should rejoice in the fact that we are owners of such valuable resources and plan our economy accordingly.

A March 7, 2009 article by Diane Francis in the National Post begins by stating “Canada’s best stimulus package would be to launch a Marshall Plan for mining by building unpaved roads and other infrastructure to open up the country’s vast, unexplored and untapped mineral wealth in its interior and the North.” Infrastructure unlocks resources, because it makes them more economic to exploit. The single greatest discovery in Canadian mining history is the nickel deposits in the Sudbury Basin. Had the Canadian Pacific Railway been routed differently, this development would at least have been delayed, if ever made.

Francis concludes: “Canada must exploit its natural competitive advantages in order to retain living standards… Canada will never be a manufacturing powerhouse, a Silicon Valley North, another New York financial capital or a biotech giant.”

Imagine the benefit to Canada’s mining suppliers if government decided that rather than bailing out failures, it was going to put in place new strategies to back winners like our mining industry! There is no other sector that Canada dominates internationally more than it does the exploration and mining sector. We should plan to make more out of this advantage.

Jon Baird
Jon Baird, managing director of CAMESE and the immediate past president of PDAC, is interested in collective approaches to enhancing the Canadian brand in the world of mining.

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