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Surprise of the Year: The dog that barked just once


Each year, we take a look back and try to rank the surprises that took place in the previous 12 months. There is never a shortage of possibilities.

Many were surprised by the price of oil in 2006, as some were expecting prices to go over $100 per barrel while others were looking for $50 or less. As it happened, those forecasting $50 were closer, because the emerging global slowdown has been pulling prices lower. Price erosion should continue in 2007, and the Canadian dollar should continue to follow suit. Even so, that will still leave our economy unbalanced, with its head in the oven (economic hotspots like energy and housing) and its feet in the freezer (sectors suffering from slow growth and the strong dollar).

Even more forecasters were wrong about the outlook for base metal prices in 2006. The unanticipated strength in the global economy in the first half of the year, combined with bullish stories about long-term supply shortfalls and rampant speculation, pushed prices for copper, nickel, zinc and lead into the stratosphere. Here, too, the emerging global slowdown is just beginning to have its effect, and more price declines are almost certainly in store.

And then there was the U.S. election. No one seriously expected the Republicans to advance their standing but few were calling for the sort of thumpin’ that took place. The impact of this shift on the world whether in trade or in geopolitics remains a subject for speculation.

But perhaps the biggest surprise of 2006 was something that did not occur or, to paraphrase Sherlock Holmes, the surprise was that the dog barked only once, rather than not barking at all. It now appears that the global economy peaked in March or April of 2006, and a number of early signs of this turning point surfaced in May. Emerging stock markets plunged, and bond market spreads widened, as capital retreated from riskier markets and flowed into the U.S. Treasury market. At the time, this episode seemed like a harbinger of more such episodes to come, as the global slowdown would lead to a process of risk recalibration that would reverberate around the world. Instead, financial markets came around to the view that the U.S. economy would see a soft landing, perhaps even a perfect one, and that Europe and Japan would continue unscathed. As a consequence, some of those losses were recovered over the course of the summer.

Meanwhile, the surprise of the year in 2006 the $39 DVD player continued to play itself out in 2007. Reports are that the price point is now $28. At this rate, DVD players could be free by Christmas 2009! What this illustrates is that the undercurrent of rising global productivity, falling goods prices and rising consumer purchasing power continues unabated.

The bottom line? Despite all these surprises, and many other stresses, both economic and political, life goes on. The world truly seems to be a more resilient place today reassuring, because investors need to be on the lookout for more barking dogs, like last May, in 2007.

Stephen Poloz is Senior Vice-President, Corporate Affairs and Chief Economist, Export Development Canada. His column on trade-related issues appears weekly on www.ctl.ca.


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