"The chart between oil and the Canadian dollar looks like a pair of train tracks," said Bank of Canada governor Stephen Poloz in Ottawa Thursday.
As Poloz was speaking, fears of a meltdown in China, one of the world's biggest resource consumers, was sending Canada's commodities-heavy stock index to a bear market close.
The governor's folksy description of oil and loonie plunging in perfect parallel was in sharp contrast to what he sees as the result of that plunge: a sharp divergence, not just between the U.S. and Canadian economies but between Canada's shrinking oil and resources sector and a recovery in other parts of the economy.
That double divergence is expected to show up in the jobs market — and the recovery won't be quick.
- TSX in bear market as China fears grow
- Stephen Poloz says divergent monetary policy may see loonie lower
- Loonie hits lowest level since 2003 as Canadian oil trades below $20 US a barrel
Despite the new gloom that accompanied the global market tumble, Poloz said, there is already evidence of what he called a "solid U.S. economic expansion." This week, an independent payroll survey showed the private sector created 257,000 jobs in December, the most in 12 months.
U.S. economists are forecasting that Friday's job numbers will show 200,000 new jobs created in December and are predicting unemployment will stay at a low five per cent — whereas Canada's unemployment rate lingers around seven per cent.
On Friday, Statistics Canada said Canada's economy added an unexpected 23,000 jobs in December but almost all of them were in one province — Ontario.
Alberta and many other provinces lost ground, something that underscores a growing gap within the country: As energy prices fall from low to low, we are seeing what Maclean's magazine this week called the death of the Alberta dream.
"The unemployment rate in the energy-intensive provinces has risen by more than two per cent since November 2014," Poloz said.
During the same period, he said, the jobless rate has remained unchanged for the rest of the country.
Our chief central banker says he can do nothing about the world price of oil, but as commodity prices crash worldwide, there is some small comfort for Canadian producers. The parallel plunge in the loonie reduces the Canadian costs of doing business here. Yet oil remains priced in U.S. dollars, reducing some of the pain.
For the nation as a whole, there is a second consolation, but it isn't as soothing to the oil-producing provinces. In fact, speaking to an Ottawa audience, Poloz perhaps unintentionally framed it in a way that made it seem Alberta's loss was everyone else's gain, and vice versa.
Recovery 'buried in the data'
"During the last 10 years or so, we've lost close to 10,000 manufacturing exporting firms," said Poloz. "But at the time, that was replaced by new jobs in the energy sector. Now, we expect the reverse to happen."
Poloz insists the low loonie is already sparking a realignment as the country's growth engine shifts from the commodities sector to the non-commodities part of the economy but says the gains are "buried in the data" as losses hit so many different companies with links to the energy and commodity sectors.
Just as the destruction of the non-resource sector happened over a decade, this recovery will also be measured in years — even with the low loonie. The new divergence within the Canadian economy can be compared to a slow healing process after a major injury, which could take up to five years, Poloz said.
And that healing process could be prolonged by another big shock.
Growing China fears
Enter the growing crisis in China that international financier George Soros, who made his fortune betting against the British pound in a previous crisis, has called an echo of the global crash of seven years ago.
"China has a major adjustment problem," said Soros at an economic conference in Sri Lanka.. "I would say it amounts to a crisis. When I look at the financial markets, there is a serious challenge which reminds me of the crisis we had in 2008."
Back then, few predicted that a U.S. meltdown, based on over-valued house prices, would sweep around the world. It's not clear whether a similar meltdown based on an over-heated Chinese economy would have as wide an impact.
But a serious disruption in China's economy will have ripples that reach far beyond Canada's resource sector. By hurting export markets around the world, damaging financial markets in ways we cannot yet understand, it could also send Canada's industrial export recovery far off track.
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