A strike on Syria: What could it do to Canada's economy?

A look at financial markets, oil prices and the loonie

Ugarit News/via AP video

Secretary of State John Kerry has made public the evidence against Syria regarding a chemical attack against its own people and it appears America is getting ready for what now looks like a solo strike against Syria. What’s in store for the global economy and Canada?

A few pointers:

Financial markets. Syria is a concern, but the markets have bigger worries right now. Emerging economies like India, Indonesia and Brazil are facing massive capital outflows as investors move their cash into the U.S. and other rich nations, where growth prospects and interest rates are rising. In Washington, Democrats and Republicans are gearing up for another debt ceiling fight. The Fed is expected to slow the pace of its asset-buying program in the fall, which will push up long-term interest rates on things like bonds and mortgage rates. All of these developments have more obvious implications for the global economy than a limited military attack in Syria. In general, history suggests geopolitical events have a modest impact on financial markets. The stock dive of the Summer of 2011, for example, had little to do with the anti-Gaddafi strike: It was the debt-ceiling crisis cum U.S. credit rating downgrade that really rattled investors’ nerves. On this, financial newsletter editor Mark Hulbert, over at Market Watch, has dug up an interesting 1989 study co-authored by none other than Fed chair hopeful Larry Summers. The research finds that most non-economic news, from Pearl Harbor up to 1987, failed to provoke big stock market swings.

Oil prices. Oil prices spiked after news of an impending Syria mission, but they are expected to come down once the attack has taken place—assuming all goes as the White House hopes. Syria isn’t a big oil producer, but supply disruptions could get serious if the surgical strike degenerates into a wider Middle East conflict. Severe supply shocks can contribute to worldwide recessions, as with the first Gulf War, analysts at Barclays said in a client note this week. The global economy is much better at coping with oil-price increases caused by a rise in global demand, as seen in the past decade. Still, the Financial Times‘ Nick Butler notes that any decline in oil supply from the Middle East might have more modest effects this time around because the world’s demand for oil from that region is decreasing—thank the economic slowdown in China and the shale revolution in the U.S. The latter is particularly good news for Canada because it means that the American economy might be less vulnerable to an oil price shock than it used to be.

The loonie. The rule of thumb is that oil price hikes are a transfer of wealth from oil-importing to oil-exporting nations. Canada is on the right side of this, of course, and the loonie has done relatively well during previous supply shocks. Still, the Canadian dollar could depreciate, should the shock become severe, Barlays analysts warn. A sharp and sustained oil price shock could threaten global growth and send investors seeking refuge in a few safe-haven currencies, like the U.S. dollar.

This article appeared first on Canadian Business.