Thursday, March 13, 2008

Can the resource boom last?

Mark Carney says no:

TORONTO — The high commodity prices that have shielded Canada from recessionary conditions in the United States are poised to weaken and drag down the Canadian economy, the Bank of Canada's new Governor warned yesterday.

Even though oil and gold have been trading at record levels over the past few days, Mark Carney said in an interview he is looking beyond the day-to-day market gyrations to determine how the U.S. slump will worm its way into Canada.

Already, Canada has felt the effects of plunging exports to the United States, and is gradually feeling the impact of tighter credit conditions spilling over the border, Mr. Carney said.

Now it appears the U.S. slump will be deeper and will stick around longer than the central bank had expected, and the pain is being felt around the world, Mr. Carney said.

Global demand for many of the commodities that have fuelled Canada's prosperity will be hit, he predicted in his first round of interviews since becoming Governor of the central bank last month.

“Ultimately, it means slower growth than otherwise would have been experienced in a range of markets, including in emerging market economies.”

“That will have an impact on the outlook for commodity prices and terms of trade – a dampening impact,” Mr. Carney said.

“You don't see it in spot markets right now but you will likely see it going forward. That's one channel through which this will come back into Canada.”

Get the full version here

--Historically we have seen resource prices decrease over time as economies move to other forms of production. However, the last few years this trend has reversed. Will it continue? Nobody knows, but history is not on our side.

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