Did you hear that loud "pop" emanating from Bay Street last week? Its shock waves reverberated across the country, culminating with Friday's disastrous employment numbers. It was a pop that marked the beginning of the end of the Great Canadian Commodity Bubble.
The price of oil is down $30 from its July 11 peak. Other commodities have also retreated, dragged down by the American slowdown and sluggish global growth. The Canadian dollar is retreating in step, off four cents (U.S.) last week alone. Employment is falling, GDP is shrinking, housing prices are turning south and the Toronto stock market (which set a commodity-fuelled record just six weeks ago) has shed nearly $200-billion in value. Get ready for more rocking and rolling to come.
The Great Canadian Commodity Bubble dates back to 2002, when global commodity prices first took flight, taking Canadian resource profits and our loonie along for the ride. The oil barons and takeover artists have been partying hard for six long years since. But now the whole country will be nursing the hangover.
I sound a lot like a mother berating two rough-housing kids. But I've been saying all along that this bubble (like the equally ill-fated dot-com bubble that preceded it) could only end in tears.
Canadian policy-makers (in the federal government and the Bank of Canada, in particular) allowed an obviously speculative, unsustainable runup in global commodity markets to dictate the complete economic direction of our country. They boasted of resource windfalls and our future as an "energy superpower."
They didn't just tolerate the overvalued currency, they actually endorsed it, as a welcome sign of Canada's "strong fundamentals." And they ratified the unprecedented surge of foreign takeovers, concentrated in commodities, that undid decades of improvement in our international investment position.
The party is winding down, but the damage will last for a long time. Here are just a few of the ways we'll pay a big future price for the excesses of the last six years:
Trade balance: Canada's non-minerals trade balance crumbled during the bubble: from a $17-billion surplus, in 2002, to a deficit that will exceed $30-billion this year. We used sky-high commodity profits to bankroll our growing deficit in everything else. Now, however, falling commodity prices will fully expose our general trade failure.
Budget balance: Lured by short-term resource revenues, governments (led by Ottawa) cut all sorts of taxes. But as resource revenues shrink, they'll now face growing budget shortfalls. Expect the deficit that Ottawa racked up in April and May of this year to be the first of many.
Economic structure: Ottawa stood by while the sky-high loonie hammered all our non-resource export industries (especially manufacturing, but also tourism and services). Free-trade economists said we should go with the flow, producing whatever global markets think is most valuable. So long as our resources were in hot demand, who cared about closed factories? The auto industry took a double whammy: In addition to the broader manufacturing challenge, record fuel prices drove consumers further toward imported vehicles. Sadly, even with the bubble bursting and the dollar coming back down (hopefully by another 10 cents), those jobs won't come back - unless there's a concerted effort to bring them back.
Environmental credibility: With oil-sands dollars in their eyes, Ottawa and the oil-producing provinces conspired to deep-six Canada's Kyoto commitments (and to play a distinctly unhelpful role in follow-up international negotiations). In retrospect, abandoning our duty to help address the greatest challenge of our era, just because it might slow down a commodities boom that couldn't last anyway, seems doubly short-sighted.
The coming shakeout (just in time, it seems, for a fall federal election) will undo some of the excesses of the Great Canadian Commodities Bubble - automatically, if very painfully. But we should be wary of underlying structural forces that continue to push Canada toward greater resource dependence. The oil industry pocketed unbelievable profits at $140 a barrel; yet its profits will still be enormous even at $70. U.S. hunger for our energy (considered as secure as their own, thanks to NAFTA) will keep billions pouring into the oil sands.
The mismanagement of the commodities bubble should, in my judgment, go down in history as one of the most damaging policy failures in our postwar history. Rather than unquestionably surfing the global wave, first up and now down, we should have tilted against the winds of unsustainable global commodities markets and intervened to mute their impact on our industries and consumers. Other resource-rich countries (such as Norway) did that, and won't be affected remotely as badly by the current retrenchment.
After this failure, will we learn not to hop onto this pointless roller coaster the next time it pulls up at our national doorstep?
Jim Stanford is an economist with the Canadian Auto Workers union