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Econowatch: If a giant stumbles…


 

For the past decade, it has been difficult to pick-up a newspaper without reading a headline about China’s phenomenal economic growth and its impact on everything from oil prices to global food supplies. And thanks to our resource-based economy, Canada in particular has benefitted from the boom in commodity prices sparked by China’s seemingly insatiable appetite for oil and other raw materials. But what happens if China’s growth were to slow dramatically over the next few years?

That is the question that two senior TD economists tackled in a report out today. While they caution their outlook is for moderating of growth to 9 per cent to 9.5 per cent between now and 2013, Craig Alexander and Pascal Gauthier conducted what they called a “stress test” for the Canadian economy by looking at the impact of a relatively anemic growth rate (for China at least) of just 5 per cent to 7 per cent over the same time period—an unlikely, but still possible, outcome of current efforts by the Chinese government to reign in inflation and keep housing prices in check. The results aren’t pretty.

While there would be an immediate hit to Canadian exports, it turns out that is the least of our problems. The real damage would come from a slowing of the global economy as a fragile recovery is knocked off course. Commodity prices would plummet, taking Canada’s economy down with it. In their model, the price of oil alone would plunge between 30 per cent and 40 per cent. “A swift decline in commodity prices would dramatically impact Canada’s terms of trade and aggregate income, with these impacts being especially pronounced among resource-based regions of the country,” the authors write, adding that overall income in Canada could fall by $100 billion in just one year.

Of course, this is likely a worst case scenario. But it nevertheless highlights China’s huge influence on our economic fortunes. For better or worse.


 

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