Goodness help this country when the commodity boom eventually ends.
What will we have to show for the five-year surge in oil prices, the boom in nickel and copper and, lately, soaring wheat and corn?
We will have a fully developed and thriving oilsands industry, some new mines, slick new digs in some sparkling new condos, a bunch of flat-screen TVs, fancy cars and hulking new stainless-steel barbecues — all generated by the income the boom has produced.
We will have some slightly lower taxes but also a newly bloated public service.
What we will not have is a lean, productive economy, pumping out strong growth and taking full advantage of the only truly infinite natural resource: human brainpower. Through these long boom years we have received a lot of income but we have not produced much growth with it.
The rush of data from Canada and the United States last week reinforces the fundamental difference in how the two countries operate: We’ve been getting by on windfall income gains from commodities and they’ve been getting by on higher output, even though they’ve been dragged through the wringer by a disastrous housing and credit-market meltdown.
Douglas Porter, deputy chief economist at BMO Capital Markets, offers a nifty analogy to encapsulate what is happening in Canada.
“Think of a winery in France,” he says. “They are producing the same 5,000 cases of wine each and every year, just going along and receiving the same $15/bottle or so every year, not getting much ahead. Then, suddenly, one day a buyer from Dubai waltzes in and pays them $50/ bottle, and agrees to pay that for the next 10 years.”
Suddenly, the winery can afford to hire an extra worker to help out so the owner can take it easy, and maybe a maid and a butler and still their profits are up, and they can spend more on lots of other goods, without producing a single extra bottle of wine, Mr. Porter says.
Substitute oil or potash or wheat for wine and you’ve got Canada. Net result? Output is flat, spending and employment are up and everybody in the winery is better off without any increase in real GDP.
The United States goes about its economy a different way. Pretend they are truffle farmers, Mr. Porter says.
“One day, the National Post declares that truffles make you fat …demand plunges instantly around the world, and prices plummet,” he says. “The truffle farmer has to lay off his whole staff, but keeps the pigs working and works feverishly himself to produce the same amount of truffles, or even a few more, just to pay the bills.”
Net result? A bit more output, less employment, but way less income and the farmer is much worse off, not to mention his laid-off workers. That’s about the state the U.S. finds itself in, Mr. Porter says.
However, the truffle farmer has done one crucial thing that will pay off in the future. He has made his little truffle operation way more productive, and so when the price of truffles rises he will be sitting pretty. He will get a boost from rising prices and rising productivity.
The U.S. economy just keeps chugging along, doing everything it has to do put itself back together again. It’s called resiliency and the U.S. economy is famous for it.
Despite Canada’s incredible windfall and the United States’ hardship, Canada has actually lagged the United States in real GDP growth over the past year.
Some economists now say we could be in the odd position in which Canada could actually be dragged into negative growth by the U.S. housing-led slump in the first quarter of this year but the United States skates through with positive growth.
David Wolf, Canadian economist at Merrill Lynch forecasts t hat Canadian growth, after contracting unexpectedly 0.2% in February, will be flat in the first quarter, while Ted Carmichael expects meagre growth of just 0.1% — a hair away from the beginnings of recession, which is classically defined as two quarters of negative growth.
Both would be ahead of the 0.6% the United States reported for the first quarter last Wednesday.
The main culprit here has been the soaring Canadian dollar, which has hit exports so hard the drag has just about neutralized robust domestic demand. But the other issue is, Canada, unlike the United States, has had dreadful productivity growth. Output per worker has been either flatlined or falling for years. We’ve been hiring thousands more workers mostly in the service sector but have little to show for it.
The manufacturing sector which is most exposed to the strong dollar has been getting lean and mean but it is an increasingly small portion of Canada’s economy. In the United States productivity growth goes hand in hand with technology development and absorption. We do have RIM.
Stock markets have already sniffed out the U.S. turnaround.
The commodity boom could continue for years — many analysts think it will — but where will we be if it doesn’t?