Canada, with its vast resources of commodities and raw materials, is profiting more than any other industrialized country from a rally in commodities that has been going on for more than six months and which some experts see as the beginning of an imminent “commodity super cycle”. In addition to massive price increases such as for copper, iron ore, steel, and wood, also wheat has hit its highest price in eight years, while WTI oil price has now exceeded the US$ 65 per barrel mark, the highest level since the start of the pandemic.
At the same time, and almost mirror-imaged, the domestic currency and interest rates are rising in Canada. The Canadian dollar, also known as “loonie,” is currently trading close to a 6-year high and the yield on 5-year-old bonds is currently one of the highest among the largest ten industrialized countries. Because the Bank of Canada is already signalling – unlike other global central banks – that it could raise key interest rates sooner than in most other countries to prevent and fight inflationary tendencies. At their meeting last week, a reduction of the speed of the monthly bond purchases was announced, a sign that the Canadian economy may soon need fewer stimuli. The current price of interest rate swaps also suggests that the market expects at least two rate hikes by the end of next year.
If other countries wait to raise interest rates, Canada could thus benefit not only from the global commodity boom but also from a relative attractiveness in terms of positive interest rates and a strong currency, which are interesting for international investors who are looking for attractive returns.
However, these positive aspects must not obscure the possible negative side effects of this development -inflation, interest rate increases and higher production costs – which could affect parts of the economy and society and could further intensify existing inequalities. While Canada’s West tends to benefit strongly from the commodity boom, higher commodity costs and interest rates could become a challenge for certain regions and sectors with a high share of the manufacturing industry (i.e., in Ontario) and the low-wage sector could be hit hard if this sector must cut jobs to reduce costs.
Canadian politicians are thus faced with the dilemma and the challenge of being able to reduce large budget deficits on the one hand by using the growth triggered by the boom, but on the other hand, forced to ensure that people and regions do not lag. The question also arises as to how Canada with the boom in the old commodity industries can at the same time achieve the ambitious goals of the New Green Deal and climate neutrality going forward.
Innovative solutions from Canadian politics and business are required such that the entire country and all areas can profit from this possible super cycle.