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Miners work in the open pit mine at Agnico-Eagle's Meadowbank Mine facility in Nunavut in August.Sean Kilpatrick

I've been making the point over the past few years (for example, here, here and here) that the Canadian 2008-09 recession was caused by the combination of a credit crunch and a sharp drop in commodity prices. When those causes were removed in mid-2009, our economy was able to recover. In May 2010, I noted that "[a] long as commodity prices continue to recover, so will the Canadian economy."

So, I've been paying more attention to commodity prices over the past few months than to the turmoil in Europe and the United States. Unfortunately, the news is less than encouraging on that front: oil prices are down 26 per cent from their peak in April, and the Bank of Canada's commodity price index is down 18 per cent. The levels are still fairly high by historical standards -- oil at $80 (U.S.) a barrel is not cheap -- but the decline is unwelcome, nonetheless.

Forecasting movements in oil prices is a humbling exercise, and I'm not going to attempt it here. Asian economic growth has been the driving force behind the rise in commodity prices, so the bad scenario would involve a slowdown in economic growth in China that is worse than anticipated.

The good scenario would involve better-than expected growth in Asia -- after all, it's hard to make a strong connection between a European financial crisis and the Chinese real economy. For what it's worth, futures markets are predicting that oil prices will gradually rise over the next few months.

If commodity prices do in fact drift sideways for the next few months, our not-particularly-rapid recovery will be slowed, and more at risk from another downturn in the U.S.

To the extent that any policy response is required, the foreign exchange markets are doing much of the job for us: a 10 per cent depreciation of the Canadian dollar will give the non-resource export sector a chance to contribute to the recovery. And since the Bank of Canada's overnight rate target is still 75 basis points above its lower bound, there is still some room for more conventional monetary stimulus.

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