oil pump
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Despite an overlap in commodities exports with Russia, Canada is unlikely to experience a significant GDP bump this year as a result of the war in Ukraine, a report from CIBC Economics says.

Russia’s invasion of Ukraine will likely lead to higher inflation and slower growth for the global economy this year. For Canada, the surge in energy prices hasn’t translated to a boost for the loonie, as reduced capital spending means a smaller role for the energy sector in overall GDP.

Higher food and energy prices will likely push Canadian inflation above 6%, the report said. And while pandemic savings will provide a cushion, some of that money has been spent on down payments for houses or invested in retirement savings.

“In the near term, even for a resource exporter like Canada, the impact of higher inflation on consumers, and slower global growth on non-resource exporters, is likely to counter any wins for commodities sectors,” the report said.

While Russia’s exports — which include gold, wheat, aluminum and wood in additional to oil and gas — overlap significantly with Canada’s, almost half of Canada’s goods exports are not resource-related, the report said. High energy prices and a slowing global economy could hurt other important Canadian export sectors such as aerospace, motor vehicles and parts, and machinery.

While the authors noted the old saying about Canadians being “hewers of wood and drawers of water,” the hewing has fallen off in recent years. As for oil, the Canadian industry seems focused on “conservative capital spending plans and returning profits to shareholders, with modest growth for output and capital spending this year,” the report said.

Fertilizer producers could see higher prices for a more extended period, and there are opportunities for Canadian firms to increase production, it said, though rail strikes pose a risk.

Wheat prices could remain high with the Ukrainian harvest in doubt. While drought in the Prairies remains a risk, CIBC said Canadian production is likely to grow this year with the higher prices for the crop.

Canada’s liquid natural gas sector could benefit longer term from bans of Russian LNG, though the largest Canadian project is still three years from production, the report said. A gap in global LNG supply could accelerate that timetable or hasten other projects, but these would “come online in the last few years of this decade, and aren’t therefore relevant to current macroeconomic views of Canada.”

When it comes to mining, capital spending plans in Canada were already at their highest in a decade before Russia’s invasion, but ramping up production is still a “long-term project,” the report said. The conflict could lead to growth in uranium output as the world looks for suppliers outside of Russian and Kazakhstan.

Overall, while certain commodities sectors stand to gain, the hit to other export sectors from the war and the higher costs for consumers will likely cancel out any economic benefits.

The longer-term effects could be more significant, the report said, if buyers in various sectors start to look for politically safer options.

“While this will be a story that will play out over several years, and not a big gift to Canada for 2022 GDP, the realignment of trade flows could be a winner for this country if we capitalize on those opportunities,” it said.