Canada's economic picture turning from golden to grey
Commodity and resource sectors slumping despite good performance in overall economy
Tod Mohamed
The Ottawa Citizen
Only months after the Liberal government declared Canada to be in a new golden age, lumber mills on the west coast are grinding to a halt. Sales of grain and pork to vital Asian markets are slumping. After all the boasts, there is talk in some corners of recession.
Economists may disagree over what depths Canada's economy will plumb, but they all seem to agree the root of the economy's stunning loss of momentum lies with Canada's resource-driven economy.
Canadians might prefer to think of themselves as part of a high-tech economy rather than hewers of wood and drawers of water, but natural resources still make up a large part of the Canadian economy. Battered by Asia's woes, the commodities sectors are providing a stiff jolt on what was supposed to be a road paved with gold.
"It's very trendy to talk about the new economy but one should never lose sight of the fact that resources play a very important role" in Canada, said Philip Cross, chief of current economic analysis at Statistics Canada.
"There's no doubt the economy has been slowing through this year and no doubt the primary reason for that is the resources sector."
In 1961, agricultural produces, wood, pulp and paper, minerals and oil and gas accounted for about 18.5 per cent of Canada's Gross Domestic Product.
That number has been cut nearly in half, dropping to about 9.7 per cent by last year.
But compared to the other G-7 countries, Canada is still seen as a resource based economy.
According to European Union spokesman Roy Christensen, commodities account for less than five per cent of GDP in Britain, France Italy and Germany. In the U.S., natural resources accounted for about 3.2 per cent of GDP in 1996.
Commodities figure even more prominently in Canadian exports accounting for a robust 37 per cent of merchandise sold to other countries last year.
That dependence on commodities is most pronounced outside of Ontario.
"Aside from Ontario, the industrial heartland, and to some degree Quebec, resources are the major export of most of the other provinces (including) British Columbia, Alberta, Saskatchewan and Manitoba," said David Bond, an economics professor at UBC and formerly the chief economist for the Hong Kong Bank of Canada.
The Asian crisis has shone a spotlight on the importance -- and the vulnerability -- of Canada's commodities sector.
As the Far East economies shrink, their demand for Canadian raw and semi-processed materials has dropped dramatically, magnified by the deflated value of Asian currencies in relation to the U.S. dollar, which is the currency that governs trade in commodities.
As demand for commodities has dropped, so have commodity prices -- in many cases by 20 per cent or more.
The effect of the Asian down turn on producers, especially for export markets, has been dramatic.
"Commodities feel it first," said Bond, because when manufacturers stop producing, they cancel their raw material contracts first.
For example, Asian demand for B.C. lumber has fallen from $2.8 billion to less than $2 billion, triggered by a 17 per cent slide in housing starts in Japan last year.
"That hit us very directly," said John Powles, vice president of markets and trade for B.C.'s Council of Forest Industries.
"In an 18-month span, we lost close to a billion dollars.
"It's affected the coastal region of B.C. the most because they are the most dependent on Japanese markets. We've seen permanent mill closures and significant down time. Twenty to thirty per cent of the work force on the coast has been idle at any one time. The combination of prices being down and not being able to sell has been a double whammy."
Vancouver-based Harmac Pacific Inc., has seen its sales of pulp drop by about a quarter.
CEO Michael Flannery says Harmac has shut down their mill at Nanaimo for three weeks so far this year.
"That's not desirable," said Mr. Flannery.
Demand for Canadian pork has dropped off as well. South Korea was Canada's fourth largest customer last year, purchasing about $50 million worth in 1997. So far in 1998 they have bought less than $1 million.
"It's true that in Korea there has been some decline," said Jacques Pomerleau, executive director of Canada Pork International, an association of Canadian pork exporters.
"We have to adjust to the new realities" in Asia.
Despite the sudden downturn, which has also seen pork prices drop by 20 per cent, the mood in the industry is upbeat.
"Everybody's expanding, everybody's looking for markets," said Mr. Pomerleau.
The mood is less upbeat on the Prairies, where wheat futures fell to a seven and a half year low earlier this week. Prices rebounded to $2.51 U.S. a bushel yesterday, but wheat is still about 30 per cent below last year's price.
"A lot of people in the prairies are not excited by this year's crop. You are looking at low quality and a bad price for it," said Mr. Cross.
The big question is whether or not the slide in the commodities sector is enough to trigger a recession.
"What will happen with Asian demand? I don't think there's a consensus view. My own view is that prices will continue to weaken into 1999 and possibly longer (and) we are going to have negative growth for the last two quarters of this year," said said George Pedersson, president of G.A. Pedersson and Associates, an economic consulting firm.
"I think we've had the makings of a recession in Canada for a long time, and this could be the straw that breaks the camel's back."
Others are more optimistic that Asian demand will rebound, allowing Canada to continue down its golden path.
"The big negative in the resource sector ... isn't enough to pull down the whole economy. It's certainly slowing down the economy but it would take another big external event" to cause a recession, said Mr. Cross.
"When you get this kind of calamitous price drop the negatives tend to work their way through the economy rather rapidly. The positives are spread over a longer period of time."
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