Commodity slump bruises trade HEATHER SCOFFIELD AND ANDY HOFFMAN From Tuesday’s Globe and Mail January 13, 2009 at 11:01 PM EST TORONTO/OTTAWA - The world is turning its back on Canada’s commodities.

Slumping global demand for resources, particularly oil, drove Canada’s trade surplus to its lowest level in more than a decade, pointing to lower corporate profits and a deepening downturn in the months to come.

Deteriorating demand and falling prices for energy products spurred a 6.8-per-cent drop in exports, while the same factors drove a 4.8-per-cent slide in imports, Statistics Canada said. The trade surplus for November was just $1.3-billion, the slimmest one since 1997.

Crude producers such as Calgary’s Canadian Oil Sands Trust are being sideswiped by the sudden economic shift.

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Britain’s export slump drives trade deficit to record level "The demand and expectations for demand are a lot lower, given the economic outlook, and that is resulting in very weak commodity prices for the sector," said Siren Fisekci, the company’s director of investor relations.

"It is surprising. We’ve seen crude oil prices drop quite dramatically, and I don’t think anybody anticipated they’d come off that hard," she said.

Energy and resources such as metals have been a bountiful source of income for Canadian companies, governments and consumers the past couple of years, and energy exports alone kept the Canadian trade balance in surplus this year.

Until this summer, high energy prices somewhat insulated Canada from the downturn in the United States and Europe. Corporate profits, government revenues and consumer spending remained healthy, mainly as money made from commodities trickled through the economy.

But average crude prices have plunged since then, falling about 25 per cent in November alone. Energy exports declined 19.4 per cent in the month, and are expected to continue to plunge as prices and demand keep deteriorating. Instead of insulating Canada from the global downturn, commodities are now exacerbating the effects of the slump on Canada.

"Economic conditions and exchange factors can have a significant impact ... on our earnings," said Pius Rolheiser, a spokesman for Imperial Oil Ltd. in Calgary.

The declines in energy exports "will have a profound negative effect on real economic growth more broadly over the medium term, in representing a substantial decline in Canadian national income, in turn hitting real domestic demand," warned David Wolf, chief economist at Merrill Lynch Canada.

Canada’s dependence on commodities has meant that the boom coated the country in money in 2007 and early 2008, but the bust is having an equally dramatic opposite effect that has yet to be fully felt, economists warned.

Before energy prices plunged, Canada’s downturn was mainly confined to the manufacturing sector in Central Canada, but now the West has been dragged into the mess as well, said Derek Holt, vice-president of economics at Scotia Capital Inc.

Cancellations of energy projects and investments "have gone through the roof," he said.

"Every region is participating in this recession."

The implications for government revenues are just as ominous, economists said. Since the large and persistent government surpluses of the past few years were tightly tied to the commodities boom, lower export earnings in the commodity sector means lower tax revenues for government.

"Sitting here in the first quarter of 2009, I would be quite certain that Canada is in a budget deficit and a current account deficit," Mr. Wolf said.

For years, Canada has boasted of being one of the few countries to consistently run budget surpluses, as well as current account surpluses. (The current account is a measure of the business Canada does with the world.)

The depreciating Canadian dollar provided some cushion for exporters in November, however. Auto exports declined in the month by 0.5 per cent, but in volume terms, factoring out the effect of prices, auto sales dropped 1.9 per cent, noted Stuart Bergman, director of economics at Export Development Canada.

"It’s a small consolation," he said, but not enough to offset the decline in global demand.

Indeed, Canada’s exports to the U.S. fell 7.4 per cent in November, and the trade surplus with the U.S. now stands at $4.5-billion - the lowest level since May, 1999.

While falling energy prices have hurt Canada’s trade position and made its economy more vulnerable to the global recession, the U.S. has benefited from cheaper oil.

The U.S. trade deficit narrowed sharply in November, as demand for oil dropped by a record amount.

The Commerce Department reported yesterday that the trade deficit narrowed to $40.4-billion (U.S.) in November, a 28.7-per-cent decline from October’s deficit of $56.7-billion.