Commodity Slump to Make Canada Poorer in ‘09

(David Parkinson — Globe & Mail)

LIVE BY SWORD, DIE BY SWORD

A key element to Canada’s economic strength over the past several years has been swelling income, which has primed consumers, businesses and governments with vital fuel to keep domestic demand humming. A key source of that income growth has been the boom in global commodity markets, which has injected considerable wealth into Canada’s resource-rich economy.

But, as Canadians are about to discover, this is a double-edged sword poised to stab deeply at the country’s economy in 2009.

Economists believe the slump in global commodity prices is not yet over, and the continued downturn will weigh particularly heavily on Canada, not just in the resource sector but across the entire economy. The result will be an outright decline in gross domestic income this year, they say, as the nation pays a heavy price for the commodity largesse of the recent past.

“We expect that Canada will, quite simply, be a poorer place in 2009,” said David Wolf, Merrill Lynch’s head Canadian economist and strategist.

TUMBLING TRADE TERMS

In a recent report, Mr. Wolf predicted that Canada’s gross domestic income would fall for the year, while nominal gross domestic product - i.e. GDP before adjusting for inflation - would tumble 2.8 per cent, the first outright contraction since 1933. Much of the blame rest with the commodity slump, which is sharply reversing Canada’s until-recently highly advantageous terms of trade.

“Terms of trade” essentially refers to the difference between the prices a country receives for its exports and what it pays for its imports. Booming commodity prices made Canada’s exports highly valuable, while a strong Canadian dollar helped keep import costs relatively low. That situation has now reversed, with the dollar down significantly and the value of Canada’s commodity exports sliced in half in recent months. Read more here.