Popular opinion suggests any slowdown in resource demand from China, which is becoming more desperate in its attempts to revive its flagging economy, will be especially bad for a commodity-dependent economy such as Canada’s. That may well be the case, but it does overlook at least one key silver lining. Sharply lower commodity prices are now offering Canada an opportunity to push the reset button on an economy that’s become distorted by an overdependence on resource markets.

Whether you’re talking about oil, coal, or copper, it seems as if all roads have led to China for going on 20 years. With the sun now appearing to set on China’s track record of robust economic growth, questions are now being asked about whether the country might follow the example of Japan’s economy, which set the world on fire decades earlier before sliding into a protracted period of stagnation that it’s still struggling to shake off.

Whether stimulus spending, rate cuts or a recent devaluation of the yuan, Beijing’s attempts to prod China’s once seemingly unstoppable manufacturing sector back to its former heights continue to fall short. As the country’s leaders are finding out, the transition towards a service economy oriented towards servicing more than a billion consumers is a different beast than what they’ve come to know. It’s a shift that global resource players, which have come to depend on steadily increasing demand from China, are also now grappling with as well.

Where does a smaller appetite for commodities leave a country like Canada? In the present moment, the answer is certainly worse off. In the longer run, though, the country could well be in better shape for the changes that will be induced.

A slowdown in China’s economic growth and, by extension, much tamer global commodity demand, presents Canada with both a challenge and an opportunity. The hard part, of course, is preventing a contraction in the oil patch from dragging down the entire economy. On the other side of the ledger, however, lower commodity prices are also helping to take the wind out of the sails of the Canadian dollar, which offers a potentially game-changing opportunity to sectors that have long suffered in the shadow of the resource boom.

While the loonie has always moved to the rhythms of commodity price cycles, in recent years it’s become even more tethered to the price of oil, largely due to the massive growth in oil sands production. Riding on the coattails of triple-digit oil prices, the loonie experienced a meteoric rise to parity and beyond against the US dollar. In the process, though, the petro-charged currency also wreaked havoc on a manufacturing sector that shed more than half a million jobs.

China is often rightly cited as the culprit for the loss of domestic factory jobs, but frequently it’s for the wrong reason. By and large, those jobs didn’t migrate across the Pacific, but instead crossed the border south to the US, as the loonie’s soaring value made Canadian labour costs uncompetitive.

Just as China’s insatiable resource appetite helped push the loonie to heights that spurred an exodus of jobs in the export sector, it works the other way as well. Indeed, a slowdown in that demand is already having profound implications for the loonie, which is now at its lowest point against the greenback in a decade, having fallen nearly 25 percent in the last few years. Throw in a Bank of Canada that appears more than willing to keep cutting interest rates to support economic growth and a move into the 70-cent range looks ever more probable.

Fortunately for Canada, big swings in a currency, such as the loonie is now experiencing, can be just as powerful at attracting footloose manufacturing jobs as they are in sending them away. Although the Canadian dollar’s march to parity may have killed hundreds of thousands of factory jobs, a move towards 70 cents will bring other jobs back. What’s more, the investments in new plants and equipment spurred by a falling loonie will boost the falling productivity of Canada’s neglected factory sector, creating a virtuous cycle.

No doubt a downshifting in China’s economic growth will bring short-term pain for Canada, but it also sets the stage for a fundamental reshaping of the country’s economy. Not since the early days of the fur trade has Canada’s economy been as dependent on a single product as it has in its recent petro-dominated incarnation.

The idea of economic diversification is often positioned as something that’s nice in theory, but difficult to achieve in practice. As lower commodity prices and a falling exchange rate breathe new life into a beaten up manufacturing sector, Canadians may actually get to enjoy the merits of a diversified economy, one that ultimately will be much more sustainable than the resource-dependent one that today serves them so poorly.

  • jaba2872

    Jeff, why do you even think or believe that you or your prognostication is even relevant anymore in the bigger picture or discussions ?

    You have become an activist instead of a qualified analyst. You have lost your mojo on your predictions and economic directions, you are out in left field with the other unicorn and pixie dust believers.

  • Jo Anne Harrison

    Jeff, how long will the transition take? How many prime ministerial careers will it cost? Since most remaining plant in Quebec and Ontario is on deferred maintenance; how are we to become competitive again, even at 70 cents, without a huge influx of American capital? It seems to me that will put us back to square one as non masters of our own house.

  • pb

    jaba2872 must be one of Stephen Harper’s propagandists. Jeff, The Carbon Bubble is bang on correct.

  • Tom

    Saudi Arabia consumes roughly 25% of its domestic production. For what, you ask? Distilling water and its own economy. Less to export, no; less revenue on what they do export. It may take a while, but the Saudi’s population will grow from 27M to 37M by 2010. The Saudi’s consume as much energy as Germany does and their population is around 81M. If the world is headed to a deflationary trend and prices stay low, the high rollers will be the first to feel the crunch. Jeff isn’t wrong about the price going up just its relative price. EROI continues to drop from a high of 100 to 1 to around 18 to 1. Do the math – they went from camels to BMW’s and Audi’s and may be headed back down to camels (well, Fords, maybe). The word growth may have to be redefined.

  • Donald Henderson

    Rubin’s rosy economic picture of Canadian mfg jobs as described in the G&M Aug 17 edition isn’t turning out to be so rosy. The half million lost mfg jobs in Ontario didn’t all go to the US, most went to Mexico. Many were lost to robotics. It appears a low value Loonie relative to the US greenback won’t attract them back or generate new mfg jobs. There won’t be significant investment in new plants. Anything Canada can mfg can be manufactured as good as and cheaper elsewhere. And diversification isn’t so easy, if it were every economy would be diversifing. As for green energy jobs, most are limited to installers, not manufacturers.