Commodity prices aren't depressed, the Bank of Canada assures us. But that doesn't mean they aren't a problem for the Canadian economy.
The central bank's quarterly Monetary Policy Report (MPR), published Wednesday, included a special section entitled "Commodity Prices Remain Elevated." In this, the central bank acknowledges the recent weakness in some of the key commodities produced in Canada. (Let's face it – they were pretty hard to miss.) However, it argues that they remain high by historical standards. And that is a positive for the country's commodity-intensive economy, particularly on the export side of the ledger.
Indeed, the bank even noted that Western Canada Select (WCS) crude oil – the benchmark grade for Canada's oil sands heavy crude, and thus a key barometer for the state of the oil market in this country – has risen 32 per cent in price since the bank's previous MPR in January, despite a retreat in prices for global crude benchmarks such as West Texas intermediate and North Sea Brent. The world's oil prices may generally be weakening, but Canada has largely dodged that bullet.
Yet there's an asterisk. And in this case, it goes by the name "volatility."
The bank noted that the big surge in WCS prices since January merely makes up for a similarly large plunge in late 2012. It said WCS has routinely been more volatile than WTI and Brent in recent years – reflecting the large market for over-the-counter spot sales of WCS as well as the periodic bottlenecks that occur in its shipments as transportation infrastructure has failed to keep pace with oil sands production.
Indeed, it noted that commodity prices in general have been "highly volatile" – and that poses a problem for investment spending by businesses in the resource sector, even as prices on average remain relatively healthy.
In a separate special section in the MPR ("Factors Weighing on the Outlook for Business Investment"), the bank noted that the oil and gas and mining sectors account for 35 per cent of business investment in Canada. Yet price volatility and uncertainty have caused companies in those sectors to retreat from spending plans, and/or to focus on smaller, less risky projects over shorter time frames rather than commit to major long-term investments. Planned spending in these sectors actually looks poised to decline in 2013, it said.
"Overall, factors weighing on investment plans in energy and mining are likely to persist in the near term," it concluded.
The bottom line on all this is that the Bank of Canada expects business fixed investment to contribute a thin 0.4 percentage points to GDP growth this year – only about one-third of its 1.2-per-cent contribution as recently as 2011. When you consider that 2011 real GDP growth was 2.6 per cent, and the bank is forecasting 1.5 per cent for 2013, it doesn't take a lot of math to see that the business investment drop-off is playing a big part in this year's tepid growth picture.