Analysis: What slowdown? Canadian economy tops G7 due to high oil and crop prices

OTTAWA/WINNIPEG, June 29 (Reuters) – Soaring oil and wheat prices are weathering commodity exporter Canada through an economic storm that threatens to tip many of the wealthy G7 countries into recession.

Russia’s invasion of Ukraine in February crippled the region’s wheat stocks and triggered Western sanctions on Russian crude, sending commodity prices soaring. Central banks have intervened to raise interest rates to stem inflation.

As a result, many countries face much weaker-than-expected growth this year as they emerge from the coronavirus pandemic.

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But as the world’s 4th largest oil producer and 4th largest wheat exporter, Canada’s fortunes follow a completely different trajectory. Commodities and agriculture make up around 10% of its economy.

“If you look at the goods that Russia and Ukraine export, it’s basically the same basket that we export,” said Pedro Antunes, chief economist at The Conference Board of Canada.

“This will not only generate benefits (for) companies, but also governments.”

Crude oil and wheat prices fell in late June on fears of a global recession reducing demand, but remain high enough to support the Canadian economy, helping to offset a housing downturn.

The International Monetary Fund (IMF) and economists polled by Reuters expect Canada to lead the G7 in economic growth this year after trailing many of its peers in 2020 and 2021, when it enacted tighter restrictions. strict against coronaviruses.

In April, the IMF predicted that Canada’s gross domestic product would grow 3.9% this year, leading the G7, but down slightly from a pre-war forecast of 4.1%. In contrast, the IMF cut the UK’s growth forecast to 3.7% from 4.7%.

With the economic outlook deteriorating since then, economists told Reuters they expected even weaker growth for most G7 countries, with Canada still relatively strong with GDP growth of 3.4% at 3.8% this year.

“We still have Canada at the top of the chart in 2022, due to a bigger rebound from (the easing of) prolonged restrictions and support in commodity prices,” said Doug Porter, chief economist at BMO. Capital Markets.


Of course, not everything is easy for Canada.

Expensive commodities pushed inflation to a nearly 40-year high, forcing the Bank of Canada to raise interest rates, which made business investment more expensive.

Ottawa’s decision to cut emissions by 2030 also prevents oil companies from increasing production, this time capping potential economic growth.

Canada’s daily oil production this year is expected to rise only 2-4% from 2021 despite high prices, said Kevin Birn, analyst at S&P Global Commodity Insights.

Yet the turnaround from 2020, when oil prices crashed, was dramatic in oil-producing Alberta, which on Tuesday reported a surprise budget surplus of C$3.9 billion ($3 billion). ) for the 2021-22 financial year. Read more

Take the experience of Roll’n Oilfield Industries, based in Red Deer, Alberta. Two years ago, it operated only 20% of its platforms to maintain oil wells and was forced to cut jobs.

“It’s like night and day, the difference now,” said company president Brad Rowbotham. “We can’t find enough people to outfit all the rigs. Everything is booked.”


A global recession could spoil the oil party, but its impact on demand is uncertain. Demand for crude fell sharply during the 2020 and 2007-09 recessions, but more modestly in 1990-91 and 2001, said Morgan Stanley commodity strategist Martijn Rats.

And inflation will also inevitably dampen demand for commodities, said Tony Tryhuk, director of commodities trading at RBC Dominion Securities, warning that the bull market could be “almost over”.

For now, prices are high, and commodity producers have the added benefit of a stronger US dollar, instead of the more typical situation of a Canadian dollar soaring as the price of the oil, making Canadian exports less competitive.

Agricultural production is also showing a rebound. Canada’s Department of Agriculture is forecasting a grain and oilseed harvest of 86.5 million tonnes, up 33% from last year when drought hit production.

War-induced food shortages in Ukraine appear to be keeping crop prices high, said Craig Klemmer, director of economics at Farm Credit Canada, an agricultural lender.

“Overall, global demand for 2022 and into 2023 is going to be very, very strong,” Klemmer said.

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Editing by Deepa Babington

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