The invasion of Ukraine and sanctions against Russia have disrupted global energy and other commodity markets and exacerbated tensions in global supply chains.
These and other effects of the war are pushing up inflation, dampening global growth, and raising risks of recession most acutely in Europe that is directly exposed to the conflict and that is highly dependent on Russia for its energy and other critical inputs.
Recent developments have served as a terse reminder of the vulnerability of economies to the control of critical commodities by one or few producers that are not committed to a peaceful global order and to high standards of market conduct.
Like Europe, North America is experiencing higher inflation, moderating growth, and a tense geopolitical environment. However, there is modest direct exposure to Russia and Ukraine.
For Canada, there are positive offsets to high input costs through higher prices for our exports. Earnings from oil and gas, cereals, fertilizers, minerals, and forest products have improved markedly, raising national income and aiding the improvement of the fiscal balances of government.
In the current context, Canada is in a position not only to earn higher prices for its resources but to also to be part of the solution to the search by key partners of stable, secure, and responsible supply of energy, food, minerals, and forest products.
To date, there has been little reinvestment of the higher export earnings into productive capacity to realize long-term benefits. Infrastructure constraints and an uncertain policy environment are among key factors that are holding back investment. Thus, the overall impact of high commodity prices on the growth outlook for Canada may be muted.
The future path of commodity prices is uncertain. Moreover, in the best of cases, there will be limits to Canada's ability to fill global supply gaps or to displace supplies from less reliable producers. Market and policy conditions will be different across commodities.
Nonetheless, there should be collaborative business and government efforts to utilize fully existing supply capacity and infrastructure, to unlock any potential increment in the short term, to capitalize on market demand and to invest proceeds in productivity enhancement and decarbonization for long-term sustainability and competitiveness.
Recognizing long project lead-times, large costs, uncertainty, and risks, investment in new supply capacity should be driven by the structural trends that will shape demand and prices, supported by a policy framework that must also be responsive to market conditions.
Absent a focus on investment, and calculated risk taking, the higher export earnings will flow largely to consumption. Canada will not sustain the positive contribution of its resource endowment to the economy and it will fail to lay critical groundwork for long-term prosperity.
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