How is Canadian economy coping with the Russia-Ukraine war

It’s been more than four and a half months since Russia started war on Ukraine. As a result, global financial markets have faced an economic decline and strong expectations of a worldwide recession.

The influence of the current war on Canada’s economy is quite clear. In all its policy rate announcements since the beginning of Russia’s invasion on February 24, the Bank of Canada has pointed to the economic challenges it keeps posing, especially in terms of a record high inflation.

The Russia-Ukraine war, combined with COVID lockdowns in China and the on-going supply chain disruptions, kept reducing the domestic economic activity and worsening inflation all over the world, the BoC noted last month.

“The war has raised uncertainty and is increasing the upward pressure on prices for energy and agricultural commodities,” – it said.

As some of the inflation we’re facing today in Canada has been caused by external factors, the central bank’s rate increases may have little effect on reducing price growth in certain segments.

However, while RBC Economics says Canada is moving towards recession, it also believes global inflation pressures may be reaching their peak quite soon, as shipping costs began to go down and high demand for goods starts moderating.

According to the authors of a recent RBC report, Claire Fan and Nathan Janzen, energy and agricultural prices went up sharply partly due to the Russia-Ukraine war, but much of the pressure on wheat prices has been reduced.

The main thing, they say, is that “this recession is expected to be moderate and short-term by historical standards, and it can be reversed as soon as the inflation goes down enough for central banks to cut interest rates.”

In terms of housing construction, Europe has been facing a lack of lumber caused by the war, according to wood market consultant Russ Taylor. The deal is that 10% of European lumber used to come from Russia, Ukraine, and Belarus.

Starting July 10, Russian wood pellet exports to Europe were stopped. According to Taylor, the impact of this change on the North American market is still unclear.

Now, Russia is actively selling its lumber into China – one of the only markets it can still have trade agreements with. Nevertheless, COVID-19 lockdowns in China are worsening supply chain disruptions and causing challenges for exporters based on North America’s west coast who now can not ship as much to that country.

At the same time, the Organization for Economic Co-operation and Development (OECD) says Canada will probably be able to withstand any economic consequences from the war, as they will be offset by other factors including the health of most of its export markets.

“Being a commodity exporter with limited trade links to vulnerable economies, Canada has a possibility to cope with economic shocks from the war in Ukraine,” – it noted. “A prolonged war in Ukraine would reduce foreign demand and lead to higher prices, but also to larger commodity revenues.”