Commodity prices to drop in 2012: BoC – by John Shmuel (National Post – January 19, 2012)

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Canada’s economy will fend off declining commodity prices and a year-long eurozone recession in 2012, but it won’t emerge unscathed, says the latest policy report from the Bank of Canada.

The central bank now forecasts a deep and prolonged recession for the eurozone compared with its outlook in October, when bank governor Mark Carney and his team said any recession in Europe would be brief. Saying that conditions have “deteriorated,” the bank is also forecasting that a year-long recession in Europe will hit non-energy commodity prices – and by extension, Canada’s resource-dependent economy.

” The crisis in Europe is expected to have an indirect impact on the Canadian economy through its implications for financial conditions, confidence and global commodity prices,” the bank said in its Monetary Policy Report.

“While the prices of base metals and agricultural commodities have recovered somewhat in recent weeks following declines in late 2011, the prices of non-energy commodities are projected to fall in 2012 in reaction to diminished prospects for global economic growth.”

Lower commodity prices, combined with four quarters of recession in Europe, will conspire to shave 0.6% from Canada’s $1.6-trillion annual gross domestic product – a loss of $10-billion in output this year.

It is not entirely a grim outlook on the commodity front, however.

The Bank of Canada does expect oil prices to rise, a factor that could help offset the bank’s projected drop in base metal and agricultural prices.

“Of course, commodities exports are just under 52% of merchandise trade exports, so they loom quite large, making the outlook quite important for Canada,” said Patricia Mohr, vice-president of economics at the Bank of Nova Scotia who specializes in commodities.

Ms. Mohr agrees non-energy commodities could take a hit in the first half of the year but should recover by the second half.

“But oil is very dominant now in the Canadian economy. I think with the outlook for oil prices holding out very well, it will help offset any damage to the country’s economy,” she said.

Trouble in Europe and declining non-energy commodity prices will likely keep the Bank of Canada’s key interest rate at its current 1% through 2012, economists say, even though household debt levels remain a worry for the central bank.

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