Sustained oil prices could bring Canada close to recession: EDC

source: http://www.canada.com/vancouversun/news/story.html?id=a0068899-6ac9-4552-8499-b814131e0534&k=38003

TORONTO - Bubbling oil prices need to burst, and soon, to prevent Canada's export sector from dragging the economy to the brink of recession, Canada's export credit agency said today.
"Exports in Canada are in recession, there's no question about that," Peter Hall, vice-president and deputy chief economist at Export Development Canada, said in an interview.
He said export prospects would remain dim as the impact of a protracted U.S. economic slowdown intensified across the globe.

"We've got 50 per cent of the world economy, even more, in the euro-zone, U.S. and Japan, altogether that are undergoing a significant slowing now. It's already happening," he said.
Hall said strength in the domestic side of the economy, which accounts for about 60 per cent of economic growth, should help Canada hold its head above water in 2008. However, with Canadian exports losing ground in the U.S. market, which accounts for 76 per cent of merchandise exports, as well as emerging weakness in other parts of the globe, exports were forecast to drag economic growth down to a painfully low one per cent this year.

The forecast puts the Canadian economy's performance at the bottom of the global list, sinking below that of the beleaguered U.S. Hall said the U.S. government's fiscal stimulus package would help the world's largest economy skirt past recession and post growth of 1.3 per cent this year.
The growth projections may seem dire, but the situation could be worse if energy prices fail to ease.

The EDC's forecasts are based on light crude averaging $82 US a barrel in 2008 and $68 in 2009. Hall said he expects oil to trade at $70 a barrel at the end of 2008. That's close to $50 less than Tuesday's intra-day record of $119.90 a barrel. But it's a far cry from the $50 a barrel oil traded for at the beginning of 2007.

"This is a bubble. Bubbles don't deflate - they pop. We just don't know when," he said, adding that oil had risen higher than he expected.

Hall said economic fundamentals showed the slowing global economy cannot sustain oil prices at the current levels. Furthermore, he believed the use of oil as a hedge against U.S. dollar weakness would unwind as slower growth drives a flight to safe-haven U.S. dollars.

"Demand and supply fundamentals just don't tell us that those prices should be the way they are right now," he said. "When world markets become convinced that this is truly a global thing, the flight to quality money is going to end up back in the U.S., and that will boost the dollar, so we're looking at that as an antidote to these currency hedge movements."

Meanwhile, Hall said food prices would continue to rise, and were already driving growth in Canada's agricultural-linked sectors.

The EDC predicts fertilizer exports to rise 31 per cent in 2008, with agricultural food up five per cent. Energy exports, despite expectations of lower prices, were expected to see a pickup in volume to rise nine per cent this year. However, consumer goods exports were tipped to fall 11 per cent, motor vehicle parts to decline nine per cent, and forestry to slip a further three per cent.

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Canada facing a possible recession could be due to the fall in demand of oil. The cause? Probably the expectations of the drop in oil prices. Oil is one of Canada's major exports, maybe that is why they are facing the risk of recession now.

The article also stated that it was the effect of U.S economic slowdown. A decrease in average income.. and since the U.S is one of the countries where Canada exports their goods to, this accounts for the fall in demand. The exports are normal goods, thus when income falls, demand for these normal goods fall as well.

So, since prices are expected to drop in the near future, maybe at that time, the demand for these goods would increase..

-xing yi