Rising commodities benefit Canada: Carney

Canada can benefit from the global commodities boom, said Bank of Canada Governor Mark Carney in a speech to the 2012 Spruce Meadows round table on Friday.

“Most fundamentally, higher commodity prices are unambiguously good for Canada,” Governor Carney told delegates. “The strength of Canada’s resource sector is a reflection of success, not a harbinger of failure.”

Read: Will equity markets keep rising?

So, while many Canadians say the short-lived commodities boom is causing permanent losses in the manufacturing sector, he countered their claims with three arguments:

• Despite the current strain on global growth, commodity prices are expected to remain elevated. They’ll be primarily driven by a sustained increase in demand, much of it stemming from the rapid urbanization of emerging markets.

• The importance of the manufacturing sector is declining all over the world, which reflects major forces of globalization and technological change.

• While rising commodity prices account for about half of the appreciation of the Canadian dollar over the past decade, other factors—like the multilateral depreciation of the U.S. dollar, and Canada’s status as a safe haven—have also contributed to increases in the value of the currency.

Read: Droughts propel commodities to food-riot prices

Regardless of the cause of a commodity-price increase, Canada’s wealth and GDP are rising as a result, says the BoC. This may be caused by stronger U.S. demand, stronger demand from emerging Asia, or a transitory reduction in supply.

The Governor also says the Bank of Canada shouldn’t lean against a commodity-driven exchange rate appreciation as suggested. Its analysis shows such a move, over time, would cause wages and inflation to rise. It would also result in an appreciation of the real exchange rate, leaving non-resource exporters with competitiveness challenges.

Read: Government to tighten belt and Faceoff: Foreign exchange

“The cost of this misadventure is lower output of about 1% and higher volatility in inflation, output and employment,” the Governor says.

Carney says policy can help minimize the costs of the inevitable, structural adjustment associated with the resource boom. All efforts should be focused on facilitating adjustment, developing new markets at home and abroad, and increasing investments in skills and productive capital.

Read: Scotiabank commodity index drops in July