With a plunging Canadian dollar, collapsing oil prices, slumping stock markets and signs that the economy stalled in the last quarter of 2015, it is easy to think that we are on the cusp of economic disaster. But the state of the Canadian economy, while indeed dismal, does not justify alarmist pronouncements that threaten to make things even worse by undermining consumer and business confidence.
Ultra low oil prices are certainly a major blow to prosperity and jobs in the resource producing provinces, and to overall exports and business investment. But we should keep in mind that the primary energy sector was a relatively small slice of total Canadian output and jobs even at the height of the bitumen boom, and that the lion's share of the capital equipment and services input needs of the sector came from the producing provinces and the United States rather than from central Canada.
The collapse in oil prices is certainly a net negative for a major producer such as Canada, but is a net positive for many sectors of the domestic economy, for our major trading partners, and for the global economy as a whole. The IMF has just forecast modest global growth of 3.4% in 2016, which will help boost Canadian non resource exports.
The very low Canadian dollar combined with a continuing recovery in the United States, still the destination of 75% of our exports, has already significantly cushioned our international trade position.
In the year from November, 2014 to November, 2015, our overall merchandise exports fell by just 1.6% despite a 40.4% fall in the value of energy exports.
As the Bank of Canada and others note, the fall in the exchange rate is, albeit very slowly, supporting a needed re-structuring of our economy towards the production of more sophisticated and higher value-added good and services. Over the past year, automotive exports rose by 24%, industrial machinery exports rose by 8% and electrical machinery exports rose by 10%. Energy products fell from 25% to 16% of all merchandise exports.
The further fall of the Canadian dollar to less than 70 cents US is cushioning the impact of the collapse of oil and mineral prices on output and the balance of payments, and will lead to further growth in net exports. For example, we will probably see a significant fall in Canada's large travel deficit, which makes up one quarter of the overall balance of payments deficit, and there are important export opportunities emerging in high value services.
A low dollar is, of course, bad news for ordinary Canadians wanting to travel outside the country, especially in the United States, and is driving grocery price inflation to close to 4%. But the overall inflation rate was, as of November, just 1.4% on an annual basis, due mainly to falling energy prices, and the Bank of Canada judges that inflation will remain well below the 2% target despite the recent accelerated depreciation of the Canadian dollar.
The low dollar is not leading to a major loss of national and household wealth as many seem to fear, since Canadians have significant net holdings of foreign and US dollar denominated financial and real assets which are now worth more in terms of Canadian dollars. Canada is not carrying high levels of foreign debt.
Another major reason not to panic about the state of the economy is that the federal government has the fiscal capacity and, hopefully, the determination to significantly boost infrastructure investment and spending on some income support programs. The Bank of Canada seems to have foregone a rate cut on January 20 in the expectation that the forthcoming federal budget will deliver a boost to growth.
A large, well designed and timely fiscal stimulus, especially one targeted to harder hit regions, will impact more on the economy than a further tweak to monetary policy, while also serving other goals such as raising productivity and tackling climate change. We are undoubtedly facing tough economic times. The oil price collapse is a short-term blow, but also underlines and magnifies the importance of making a major long-term economic transition to a more innovative, productive and environmentally sustainable economy.
These challenges are ultimately manageable and need not involve a major blow to jobs or to the living standards of Canadians. We are not on the brink of the apocalypse.
Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University, and senior policy adviser to the Broadbent Institute
Photo: Ken Teegardin. Used under a Creative Commons License.