Canada can’t afford to take its eye off China

flovestock

tim kiladze
Globe and Mail Blog
Posted on Monday, November 28, 2011 2:30PM EST

The yo-yoing continues. Some days, it seems like the euro zone is on the verge of breaking up. Others, like today, there is a renewed optimism that the region will get its act together.

Judging by how much markets rallied Monday on just hope for a deal, it appears that investors here are most concerned about the region. While the euro zone is undoubtedly linked to Canada’s economic future, don’t forget that China’s thirst for resources could ultimately have a greater effect.

Breaking up the euro zone would no doubt be catastrophic. But a plan to keep the region together will still have its flaws. Some of the brightest economists believe that even if the zone remains in tact, at least some sovereign defaults will be inevitable. That means the wounds could ripple across the Atlantic, putting some U.S. banks in need of a new bailout.

You might argue that Canada muddled through such turmoil just a few years ago. That’s true. But as much as we like to pride ourselves on Canada’s economic strength, we owe much of it to natural resources.

Ontario and Quebec’s manufacturing sectors have been hard hit, and the country’s growing innovation economy is still in its early stages of development.

We owe much of our recovery, then, to expected demand from China, which has kept resource prices high.

Of course, in a globalized world, all regions are linked. China exports cheap goods to Europe, and weaker European demand would hurt Chinese incomes, sapping their thirst for our resources.

But the point still holds. If you’re betting on a Canadian recovery, don’t just look at Europe. China’s economic cooling is just as, if not more, important.