Economy Lab

Oil prices force Carney to revisit the rules on growth

WASHINGTON — The Globe and Mail

Because Canada is a net exporter of crude, surging oil prices aren’t necessarily a blow to overall economic growth. (Gregory Sawisky/The Canadian Press)

Here’s the biggest surprise in the Bank of Canada’s policy statement on Tuesday: “The international price of oil has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum.”

This is a rewriting of the rules that dictate the course of Canada’s economy.

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Unlike the United States, Japan, and most of Europe, surging crude prices aren’t necessarily a blow to overall economic growth.

Yes, a jump at the pumps is the same as a tax, crimping household consumption. But because Canada is a net exporter of oil and other commodities, higher prices mean more money is coming into the economy from abroad, generating wealth while boosting Canada’s terms of trade. The pop in profits leads to further production, which creates jobs and puts upward pressure on wages.

And yes, the positives are weighted in Alberta’s favour, while drivers in eastern Canada might see only higher gasoline prices and factories struggle with higher input costs. But the Bank of Canada can only set policy for the entire country, and overall, the impact of higher oil prices on the entire economy is neutral, if not a positive.

At least that’s the way it used to be. The Bank of Canada last explained its thinking on commodity prices in April, 2001. The note on oil in Tuesday’s policy statement suggests the central bank’s thinking on commodity prices has changed. Expect more details when in the latest Monetary Policy Report later this morning.

The details will make for interesting reading, but the implication already is clear. Canadian policy makers, for the first time in a long time, have to start worrying about the oil price. That’s because consumers are driving growth almost entirely alone, and higher gasoline costs will cause that engine to sputter.

“The bank projects that private domestic demand will account for almost all of Canada’s economic growth over the projection horizon,” the Bank of Canada statement said.

That’s a lot like the United States, where the price of fuel is a national obsession.