The global economy is in the throes of the one of the largest energy shocks since the early 1980’s, threatening to send global inflation higher and having the potential to curtail spending and business investment in oil-importing countries, say TD economists.

In the September issue of the TD Quarterly Economic Forecast, they say higher oil prices, while still a dampening factor on consumer spending, are a boon to net oil exporting countries like Canada as it stimulates investment and increases government revenues.

They add that foreign exchange markets that justly view the loonie as a “petro-currency”. With oil prices remaining elevated this year, the Canadian dollar is expected to peak at US87¢ by early 2006 before drifting back to US83¢ at the end of the year, in-line with receding oil prices.

However, the positive benefits from higher energy prices will mostly accrue to the energy-rich provinces of the West, while export-oriented manufacturers located largely in Central Canada will be left to endure the double whammy of high fuels costs and a stronger dollar.

As a result, national economic growth rates of 2.9 and 3.0% in 2005 and 2006, respectively, will mask a sharply diverging picture of regional economic performance in Canada.

TD economists say this leaves policymakers with the dilemma of how to respond to such a diverging profile.

Concentrating on the national economic statistics, which argue for a more neutral monetary environment, the Bank of Canada is likely to take a gradual approach to lifting the overnight rate to 4.00% by the second quarter of 2006.