China’s reopening is a wildcard for Canada, which is clinging to an economic landing, analysts say

OTTAWA/TORONTO, Feb 6 (Reuters) – China’s rapid reopening is expected to boost demand for commodities that Canada produces in abundance and potentially help Canada’s economy stave off a recession as long as it doesn’t also fuel inflation and further interest rate hikes encourage .

Last month, the Bank of Canada raised interest rates to 4.5%, the highest in 15 years, and said the economy would weaken in the first half and could slide into recession. This prompted the central bank to end its most aggressive tightening cycle yet, becoming the first major central bank to do so.

But analysts say a recovery in China’s economy should boost demand for Canada’s key exports, including oil, natural gas, grains, grains and other commodities, making it more likely a long-awaited soft landing for the economy than previously thought.

China, the world’s second-largest economy, lifted many of the weakest restrictions after abruptly abandoning its strict “zero-COVID” policy in December.

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“We really see China rebound accelerating from here with growth, liquidity and anticipated tax expenditures, with the Canadian dollar and Canadian equities the main beneficiaries,” said Joseph Abramson, co-chief investment officer. at Northland Wealth Management.

Traders have been betting on Canadian stocks and the Canadian dollar, dubbed the “base currency”, since news of China’s reopening broke in December. The benchmark stock market (.GSPTSE), which is roughly 30% weighted in energy and mining stocks, is up almost 8%, while the loonie is up 1.8% against the US dollar .

Doug Porter, chief economist at BMO Capital Markets, said China’s reopening is more of a “clearer picture” for Canada than for other countries with fewer commodity exports.

Canada has the world’s third-largest oil reserves, which have risen 17.9% since China began easing restrictions in December, before returning much of those gains.

But soaring oil prices sparked by China’s reopening could fuel inflationary pressures, Bank of Canada Governor Tiff Macklem pointed out in an interview with Reuters last week, amid concerns that interest rates will rise. remain unchanged.

“The biggest near-term risk that could turn things around quickly would be if the rapid reopening of the Chinese economy leads to a spike in global commodity prices and oil prices,” Macklem said.

Meanwhile, the US Federal Reserve, European Central Bank and Bank of England have also set the course for a pause.

Most analysts foresee a more service-oriented recovery in China and do not expect this to lead to a dramatic oil shock.

“If it’s primarily services that are driving the recovery after the easing of restrictions, you may not see this explosive pressure on the cost of oil deployments around the world,” said Derek Holt, head of economics for the United States. financial markets at Scotiabank.

Karl Schamotta, chief market strategist at Corpay, said China’s reopening will help lower global price levels and potentially offset demand destruction if the economy slows.

“But we don’t think Western central banks will be forced to tighten more aggressively in response to another unexpected inflationary shock,” he added.

Reporting by Steve Scherer and Fergal Smith; Edited by Bill Berkrot

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