By Julian Beltrame
The Canadian Press
Canadians have long ceased being primarily hewers of wood and drawers of water, but there is growing appreciation among economists that resources remain the driving force behind both the current economic slump and prospects for a recovery.
TD Bank's Don Drummond, one of the country's leading private-sector economists, says he has little doubt that Canada is undergoing a commodity-price recession.
"We have hopelessly underestimated the importance of commodity prices for the Canadian economy," Drummond said in an interview.
"We underestimated the lift it gave when they were going up and we've underestimated the hurt it's going to cause on the way down."
His assessment came as Nortel Networks Corp. (TSX:NT), once the star of a Canadian high-technology industry that many thought would assure economic strength into the future, filed for bankruptcy protection in the United States and Canada.
The Toronto-based company didn't announce any new job cuts last week, but court documents reveal its global workforce has shrunk from above 90,000 employees in 2000 to about 30,000 direct and indirect jobs worldwide.
Drummond's view on commodities is supported by the latest Conference Board report, which also largely blames tumbling commodity prices on everything from copper, zinc, potash and most critically oil, for plunging Canada into recessionary times.
The Conference Board acknowledged that dampened U.S. demand also continues to hurt Canada's other exports but added: "The new and perhaps more significant factor dragging Canada into recession is the impact that much lower commodity prices are having on real income," added Pedro Antunes, an economist with the Ottawa-based think-tank.
The analysis suggests Canada's economy will be largely dependent on a global and U.S. economic recovery that restores demand, and boosts prices, for Canadian exports of raw and refined resources.
With commodity prices expected to remain weak next year, the Conference Board says Canada will record three quarters of negative growth, or shrinkage, ending in June 2009.
The technical definition of a recession is two consecutive quarters of contraction. Many observers believe Canada began a recession in October after the economy grew in the July-September quarter.
The Conference Board now expects the Canadian economy will decline by 0.5 percent and shed 175,000 jobs - 91,000 in the battered manufacturing sector.
Even massive fiscal spending expected in both Canada and the United States won't avert the downturn in 2009, the report states.
After slowly gaining for the past six years, world prices for most commodities that Canada has in abundance spiked last summer. Today, commodity prices are less than half what they were last June.
The falloff of oil is particularly dramatic, commanding a record US$147 a barrel in July, then taking a nosedive to current levels below US$40.
Drummond says the Canadian economy turned sharply downward in November, when most indicators - retail sales, house sales and prices, auto sales, employment, exports - that had been holding steady before that time suddenly fell.
Commodity companies represented more than 50 percent of the value of the Toronto Stock Exchange in June, he points out. Since then, the TSE has lost almost half its value, digging a hole in Canadians' pocketbooks and curtailing spending.
Antunes also calls the loss in national income from lower commodity prices as critical to Canada's economic prospects.
The Conference Board predicts Canadian exports will fall $13 billion in volume terms this year, but if price effects are included - the value they command on the world market - Canadians will lose out by $50 billion.
Much of that wealth would have gone to the sectors that extract and export natural resources, but the wealth also filters through the economy generally. Higher corporate profits generate more tax revenues for governments, and more investments through expansion create more jobs and higher wages.
Antunes predicts a true recovery in Canada won't occur until 2010, after a U.S. and global economic turn-around begins to increase demand for Canada exports and restores confidence.
Meanwhile, both the U.S. and Canada will suffer through a tough 2009. The Conference Board forecasts the U.S. economy will shrink three-times as much as Canada's does, by 1.7 percent, despite the Barack Obama stimulus, estimated at US$775 billion.
