A recent article by one of my favorite Canadian business reporters "Diane Francis" offers an interesting, if not disturbing, prediction for the Canadian economy over the next several years. The article is entitled 'Canada’s case of ‘Dutch Disease’, in case you wish to look it up and read the entire content, but the abreviated version of it suggests that our economies dependence on the state of affaires south of the border has waned over the past 10 to 15 years. It also suggests that our manufacturing base has been gutted (thanks to free trade in my opinion) and much of the prosperity it brought to the country has been replaced by resource based industries and natural resource demand. Of course some of that demand still comes from the U.S., but she goes on to suggest that much of it also has grown to be dependent on the economies of the developing world and in particular China.
One very disturbing point, which I can't verify, but believe to be true, is her claim that much of our countries debt obligations have been shifted to the provinces and in particular, the provinces of Ontario and Quebec. She goes on to claim that our debt problem in this country, taking into account provincial debt, is nearly as serious as the U.S. problem, but that our recent resource based economic strength (thanks to our Western provinces) has shielded us from suffering the same problems (real estate collapse) as they are having states side. The future however, she suggests, may take a different turn. China, by all accounts, appears to be experiencing rapid inflation. Since they are a "central government controlled economy (communist), we really can't determine through independent data, the validity or severity of this inflation. If however they continue to induce an economic slowdown through inflation fighting measures such as, increasing bank reserves and thereby choking off private lending, and raising prices for goods and services, they are bound to have a serious reversal at some point leading to depressed demand for raw materials and resources.She doesn't predict when this will happen, but suggests that it will hit us hard enough to create a severe slow down and perhaps a mirror of some of the economic actions presently playing out in the U.S.
I think that on surface her assumptions and general predictions are valid, but before we start to brace ourselves for the cliff that she implies is waiting ahead, we should consider a few other points.
1) While the U.S. looks to be in poor shape at the moment, they also do appear to be on the better side of this downturn and seem to be picking up (all be it more slowly than in past). If that pick up continues, they will also demand more natural resources and we are a natural and favoured supplier. (not to mention secure)
2) While the U.S. often moves slowly, there remains a strong determination to lessen their dependence on middle east oil as many believe it continues to fund terrorist activities and as such doesn't make good sense. The natural replacement is likely to be a combination of Canadian oil and natural gas.
3) There are countries other than China developing, they will also have demand for resources and resource technologies which have been develoed here.
All in all, I think the article is good in reminding us not to be too smug or self righteous in considering how well we faired as a country during this recent downturn and in comparison to our neighbours to the south. It should also serve to remind us that we may not yet have fully escaped the affects of these changes in world distribution of wealth and power. The laws of economics remain in place and debt, while it can be an important component in building wealth and security, can also have very destructive effects if uncontrolled.
What the heck is "Dutch Disease" anyway? I guess she is referring to the great tulip scandal.