OTTAWA: Canada got a blunt lesson in the first quarter on the pitfalls of relying so heavily on natural resource exports.
The country’s current account deficit hit its second-highest level on record at 17.47 billion Canadian dollars ($14.02 billion) in response to the plunge in oil prices, Statistics Canada said.
A nation’s current account is the broadest measure of its dealings with the rest of the world. A deficit indicates it’s buying more from the rest of the world than it’s selling abroad, and has to borrow from other countries to finance that.
How to curb Canada’s trade deficits and strengthen its export performance is a subject of debate. Some argue Canadians’ historic focus on resource extraction keeps the country prosperous. Others say Canada should diversify its exports to reduce dependence on commodities, which are prone to volatility.
Philip Cross, former chief economic analyst at Statistics Canada, is in the first camp. In a paper released Thursday that he authored for the MacDonald-Laurier Institute, Mr. Cross says resource industries directly contributed C$260 billion, or 16.6%, of Canada’s gross domestic product in 2010, the last year for which data is available.
Mr. Cross defines the resource sector broadly, including utilities and industries that rely on resources for greater than 17% of their inputs, which includes such sectors as primary metal manufacturing, pulp and paper manufacturing, and pipeline transport.
He says resource extraction widely benefits the Canadian economy. Each dollar in added natural resources output generates more than twice the growth in economy-wide GDP, Mr. Cross writes. “Business and financial services and transportation all see a sizeable increase in demand as output grows in the resource sector,” he adds.
The report says resources have become the dominant force in business investment in Canada, particularly the energy sector. In 2013 they accounted for 61% of all business investment in plant and equipment, up from 38.2% in 1999.
Not everyone is convinced the resource sector should remain the unquestioned lynch-pin of Canadian exports. An HSBC Canada report also out Thursday says that, due to global demand and supply conditions, prospects for Canadian oil exports will impede growth into the long-term.
Faster growth in developed economies and a recovery in emerging markets will likely bring Canadian trade growth back to pre- crisis levels, it says. But Canada shouldn’t limit itself to the status quo.
“Uncovering opportunities for new product development and trade partners, in fields like electronics, pharmaceuticals and hi-tech, would provide meaningful support to Canada’s long-term economic health beyond traditional industries and trade routes,” according to Andrew Skinner, head of Global Trade and Receivables Finance for the bank.
