Statscan - Rising commodity prices and the surging Canadian dollar have led to a divergence between real earnings growth and the increase in the purchasing power of those earnings, according to a new study. From 2002 to 2005, real earnings (real gross domestic product) rose by 8.3%, while the purchasing power of those earnings (real gross domestic income) increased by 13.4%.

The study found that high commodity prices and the rising value of the Canadian dollar against the American dollar have led to significant increases in so-called "trading gains" for many provinces, as well as the nation.

The current boom in commodity prices, initially sparked by a surge in the energy sector, is now entering its fifth year. A wide range of commodity prices, from coal to uranium, have been affected, as has the Canadian dollar, which appreciated significantly after 2003.

The study noted that as Canada commits more of its resources to production, the volume of goods available to Canadians rises and economic output, as measured by real gross domestic product (GDP), expands.

Note to readers

This release is based on a research paper that examines the impact of price changes in imports and exports on economic welfare in Canada, and in each of the provinces.

The research paper examines how shifts in terms of trade and fluctuations in the ratio of prices of traded to non-traded goods affect the purchasing power of domestic production.

It also examines the evolution of real gross domestic product (GDP) and real gross domestic income (GDI) from 1981 to 2005 nationally and in the provinces.

The difference between real GDI and real GDP originates in how exports and imports are treated. Real GDP deflates imports and exports separately, while real GDI as measured in this release deflates net exports by final domestic demand prices. Importantly, real GDP and real GDI are not adjusted for financial flows.

Real GDP and real GDI focus only on the income earned and its purchasing power within a country or province. There is no adjustment for earnings that are repatriated to other jurisdictions, which may be important for understanding the evolution of income growth in some cases.

Canada sells exports to buy imports. When the price of exports rises or the price of imports falls, it allows Canada to import more goods without having to export more raw materials.

This is referred to as a "trading gain," which is not captured by real GDP. The study uses an alternative measure called real gross domestic income (GDI) instead. Real GDI responds to changes in domestic production and changes in trading gains.

The difference between the two measures is significant. Real GDP is a measure of how much Canada earns through domestic production. On the other hand, real GDI is a measure of the goods and services that income can buy.

The study found that from 2002 to 2005, real GDP increased by 8.3%, while real gross domestic income rose by 13.4%. Trading gains added 5.1 percentage points of growth, meaning that for every $2 of extra income earned by Canada, roughly $3 extra worth of goods and services could be purchased.

"Terms of trade": Price of exports relative to price of imports

An important ratio for determining how changes in export and import prices will affect Canada is the "terms of trade." This is the price of exports relative to the price of imports.

When the ratio rises, it indicates that the value of Canada's exports is increasing. In other words, exports should purchase more imports than they would have previously. A rise in the terms of trade, therefore, indicates that trading gains are increasing, and that the quantity of goods and services that Canada can purchase with its earnings is rising.

Canada's terms of trade are primarily determined by three factors: commodity prices, the exchange rate with the American dollar, and the prices of imported manufactured goods.

The terms of trade for the provinces are also affected by the same three factors. However, resources and industries are not equally distributed across the country. Therefore, some provinces can be more susceptible to shifts in the overall terms of trade.

From 2002 to 2005, shifts in terms of trade affected real income growth in all provinces. The two provinces that were affected the most were Alberta and Newfoundland and Labrador.

Surging energy prices between 2002 and 2005 led to terms-of-trade growth in energy-exporting provinces. In Alberta and Newfoundland and Labrador, the terms-of-trade growth led to large trading gains.

During this period, real GDI in Alberta increased by 38.0%, triple the growth in real GDP. Similarly, in Newfoundland and Labrador, real GDI expanded by 23.2%, which was roughly four times its real GDP growth.

As a result, an extra dollar earned between 2002 and 2005 bought roughly $3 extra of goods and services in Alberta, and $4 extra of goods and services in Newfoundland and Labrador.

Energy-exporting provinces have experienced the largest gains. However, the impact of rising commodity prices, the appreciation of the Canadian dollar and falling prices for manufactured components have also led to improvements in the terms of trade in most of the other provinces.

Impact of commodity prices varies over time

The study illustrates how the impact of commodity prices on real income in Canada varies over time and from province to province.

Sources of growth in commodity price indexes are not constant over time. As a result, the specific commodities driving the change suggest that the impact will be different from one province to the next.

The differing impact among the provinces is important for understanding the progress of real income in Canada. Before 2002, changes in terms of trade that benefited real GDI growth in energy-importing provinces had hindered real GDI growth in energy-exporting provinces. For example, during the early 1980s, falling energy prices had inhibited real income growth in Alberta and Saskatchewan, while bolstering it in the rest of the country. The regional differences offset each other so that real GDI and real GDP growth for Canada were roughly equal.

However, the recent surge in energy prices has been accompanied by a widespread increase in provincial terms of trade resulting from the appreciation of the Canadian dollar and the higher prices of all commodities. Consequently, the terms of trade have improved in most energy-importing provinces.

The effect of higher commodity prices and the appreciation of the Canadian dollar can be illustrated by events in three provinces: Newfoundland and Labrador, Ontario and Alberta.

In the early 1980s, Newfoundland and Labrador was an energy importer. Following the development of offshore oil and gas deposits in the 1990s, the province became an energy exporter. As a result, Newfoundland and Labrador's trading gains increased sharply as energy prices increased after 2002.

In Ontario, the 1986 energy price collapse made an important contribution to an improvement in the province's terms of trade and trading gains. In 1986, real GDP increased by 4.1% while real GDI rose by 5.6%. After 1986, rising prices for commodities other than energy continued to bolster increases in trading gains until 1990.

From 1998 to 2001, the terms of trade declined in Ontario as the Canadian dollar depreciated and energy prices rose. The 55.8% rise in energy prices in 2000 led to the biggest terms-of-trade drop in this period. In 2000, real GDP rose 5.9%, but real GDI only rose 5.2%.

From 2002 to 2005, however, gains in the prices of commodities other than energy and the appreciation of the Canadian dollar helped push up trading gains in Ontario, despite continued increases in energy prices. During this period, real GDP rose 7.5% and real GDI rose 7.7%.

Among the provinces, Alberta is the most susceptible to changes in energy prices. In 1986, the decline in energy prices led to a 15.7% decrease in real GDI through trading gains in Alberta. Real GDP fell 2.3%.

But after 1998, a series of improvements in the terms of trade, precipitated by rising energy prices, contributed to trading gains that increased growth in real income.

As a result, from 2002 to 2005, the growth of real income in Alberta was three times that of real GDP growth.

THE LOOMING MASS EXODUS OF BABY BOOMERS PRESENTS PROBLEMS FOR BUSINESSES Consider these stark statistics:

* 50% of all companies recently surveyed say they expect to lose more than half of their senior managers in the next three years (RHR International study)

* 15% say they expect to lose 75% or more (RHR International study)

* More than 6 out of 10 respondents to an Ernst & Young survey say expected retirements over the next five years will cause a major ‘brain drain’ in at least some business functions

The best and brightest of businesses are on their way out, and a generational exodus like we haven’t seen in decades will soon be upon us. Companies will see their best and brightest and most experienced head off to golf courses while their businesses are left in a lurch. Complicating matters is the fact that newfangled investment strategies are shaving years off retirement age for many.

Eric Herzog, Ph.D., author of the book Future Leaders, is at the forefront of sounding a clarion call for the business world to wake up and see the problem, before it hits them in the face. It will be too late when they wave goodbye to long-term technical staff and leaders and then try to conduct business bereft of key personnel.

“Some are aware and preparing, but far too many CEO’s and senior leaders are not seeing the handwriting on the wall,” says Herzog. “It’s easy to focus on long term business development, R & D, and innovation, but losing sight of the today’s aging workforce can make achieving those goals problematic.”

Consider Arlene Dohm’s -- Economist, Office of Employment Projections, Bureau of Labor Statistics -- warning: “As aging baby-boomers begin retiring, the effects on the overall economy and on certain occupations and industries will be substantial, creating a need for younger workers to fill the vacated jobs, many of which require relatively high levels of skill.” (July 2000, Monthly Labor Review)

Herzog has worked with many large companies including JP Morgan Chase, COSTCO Wholesale, Hyundai Motor America, and Honeywell, helping them establish foolproof leadership development programs to prepare future leaders. While his company (Quest Consulting & Training Corporation) focuses on leadership and technical talent, the massive effect of Baby Boomers leaving applies to skilled workers in all areas of the organization and at all levels..

“While the exodus of senior leaders is certainly critical, many knowledge workers and skilled workers at mid and lower-levels will also be leaving,” Herzog adds. “This presents a dual problem: while junior positions are easier to fill, if companies haven’t prepared some of their talented workers before they move into management positions, companies may have performance issues as well as unfilled positions, which will affect results for years to come.”

One workplace change which may help reduce the impact is that eight in ten Boomers are planning ‘phased retirements.’ They plan to work at least part-time and gradually leave. (AARP Segmentation Analysis: Baby Boomers Envision Their Retirement.)

“Phased retirements will help, if organizations make it possible for retirees to work part time and share jobs” notes Herzog. “But fully preparing younger workers ahead of time to move up the ladder to assume management positions makes it possible to promote from within and not have to fight the battle for new hires.”

Dr. Eric Herzog is founder and president of Quest Consulting & Training Corporation, a leading organizational consulting and development firm. His innovative programs on change management, strategic planning, team building and leadership development have resulted in dramatically improved performance for hundreds of companies in various industries. Herzog received his doctorate from the MIT Sloan School of Management.

Quest developed Leader-Led Leadership Development®, which enables companies to quantify potential leadership shortages, obtain the executive involvement needed for success, and develop an internal development program within just a few months.

India, the world's second-biggest vegetable oil buyer after China, may cut imports next year following higher domestic oilseed output, taking some impetus from palm oil prices that reached a record last month.

Edible oil imports may decline 12 percent in the year starting in November, M. Somasekhar, an analyst at TransGraph Consulting Pvt., which advises traders, said by phone from Hyderabad yesterday. Rains have been 11 percent above average between June 1 and July 18, boosting sowing of crops such as soybean and peanut and reducing prospects for imported oils.

A reduction in overseas purchases by India may further boost palm oil stockpiles that reached a three-month high in June in Malaysia, the world's second-biggest producer of the commodity. It could damp prices that have risen 56 percent in the past year on surging demand from China, India and the biofuels industry.

Looking at the rains now, output is expected to be slightly higher next year,'' Amol Tilak, an analyst at Kotak Commodity Services Ltd., said by phone from Mumbai. Imports of edible oils may drop as low as 4.6 million metric tons, he said.

TransGraph forecast imports may fall to as low as 4.4 million tons in the 12 months starting in November from an estimated 5 million tons this year.

Palm oil futures on the Malaysia Derivatives Exchange may fall to as low as 2,200 ringgit ($641) a ton in the year starting November. The contract for October delivery traded little changed at 2,486 ringgit a ton at the end of morning trading today.

A gradual increase in stock levels in Malaysia by the end of this year might lead to an weak tone in prices,'' Somasekhar said in an interview. Prices will cool from the current high.''

Crop Prospects

India's output of oilseeds, which also include cotton seed and copra, may rise 5.6 percent to 34 million tons because monsoon rains are boosting sowing of soybeans and peanuts, Somasekhar said.

Rains have been good so far this year and prospects are better for higher output,'' said Govindbhai G. Patel, managing partner of Rajkot, Gujarat-based Dipak Enterprise, who has been trading vegetable oils for four decades. ``Farmers got a better price for crops last year and that will help improve sowing.''

Farmers sowed 9.51 million hectares (23.5 million acres) of monsoon oilseeds as of July 12. That's 8.8 percent more than the 8.74 million hectares planted last year, the farm ministry said in a statement in New Delhi on July 13.

Sowing of the monsoon crop, which makes up 60 percent of India's total oilseed production, begins in June. Harvesting begins in mid-September and ends in November.

Imports Surge

China, the world's biggest palm oil buyer, boosted imports of the commodity 22 percent to 2 million tons in the first six months this year, data by the Beijing-based customs office showed.

India, the world's second-biggest buyer of palm oil, increased imports by 32 percent to 1.95 million tons in the eight months ended June 30 from a year earlier, the Solvent Extractors' Association said July 16.

Malaysia's palm oil stockpiles rose 7.5 percent to a three- month high 1.2 million tons in June from May, the Malaysian Palm Oil Board said in its monthly summary on July 10. Stockpiles may rise to 1.3 million tons by the end of December, Somasekhar said.

The June-to-September rainy season will be 93 percent of the average reported between 1941 and 1990, a level considered normal, according to India's Meteorological Department. The rains water 60 percent of the country's crop land.

Palm oil, typically used as cooking oil or in soaps, is the world's most-consumed vegetable oil and can be mixed with diesel to stretch fossil fuel supplies. Soybean oil, the main alternative, is used in salad dressings as well as for biodiesel.

Soybean oil futures on the Chicago Board of Trade reached a 23-year high of 39.14 cents a pound on July 13. The contract for December delivery traded at 38.79 cents a pound at 2:07 p.m. Singapore time today, little changed from yesterday's close.

Copyright 2007 Bloomberg L.P.

Consumer demand for furniture and appliances accelerated to a 0.7% increase, its largest gain so far in 2007. Spending on other durable goods also equalled its high for 2007, driven by strong auto sales. Personal services remained the major source of growth in services employment. The housing index slowed, as higher existing home sales were offset by fewer starts in the volatile multiple units category. Housing starts for single-family homes continued to strengthen.

All the manufacturing indicators softened. New orders posted their first decline of 2007, notably as auto sales slowed in the United States. Demand for capital goods remained strong, however, especially machinery needed by the oil patch. The growth of shipments stalled, which held in check the ratio of shipments to stocks. The average workweek shrank again, and manufacturers continued to slash payrolls as the rising dollar squeezed profit margins.

The sharp upward movement in the exchange rate in the second quarter compounded the slack in US demand for our exports. The US leading indicator remained little changed, reflecting ongoing weakness in the auto and housing markets. Partly as a result, Canada's exports to the United States were up only 2.3% in the past year. Instead, exporters have diversified to overseas markets, where exports have risen 31% since May 2006.

For the third straight month, most of the growth in average price levels was attributable to costs associated with owned accommodation (+4.9%). Also a factor, but to a lesser extent, was a 2.8% increase in costs associated with operating a vehicle.

A drop in prices for computer equipment and supplies exerted downward pressure on average prices.

Excluding energy, the all-items index rose by 2.2% between June 2006 and June 2007, marginally faster than the 2.1% gain in May.

The Bank of Canada's core index rose 2.5%, faster than the 2.2% increase observed in May. The rise in homeowners' replacement cost accounted for most of this increase. This index is used by the Bank of Canada to monitor the inflation control target. Increases in this index have exceeded 2.0% for the past year.

On a monthly basis, the all-items index declined 0.2% between May and June 2007 after rising 0.4% between April and May. This is the first monthly decline in the all-items index since October 2006. The downturn was largely due to declining gasoline prices and prices for women's and men's clothing.

Both the all-items index without energy and the core index remained unchanged between May and June 2007, following increases of 0.3% between April and May.

12-month change: Higher costs for owned accommodation and motor vehicle operations fuel the growth

The 12-month rise of 2.2% in the Consumer Price Index (CPI) was essentially due to the strength of costs associated with owned accommodation, combined with the growth in costs of operating motor vehicles.

For a third straight month, costs associated with owned accommodation accounted for most of the increase in average price levels over 12 months.

Within this category, the component that contributed the most to the increase was mortgage interest cost, which rose 5.7%, the same growth rate as in May and April. It was the fastest rate of growth since January 2001.

For the past several months, the growth in prices for new houses has been driving the sustained increase in mortgage interest cost.

Homeowners' replacement cost also contributed to the increase in the CPI in June. This component, which represents the worn-out structural portion of housing and is estimated using new housing prices (excluding land), rose by 6.1% between June 2006 and June 2007. This was up slightly from the 6.0% increase observed in May.

This minor upswing in the rate of growth for this component followed seven months of slowdown. June's increase was less than the average monthly change posted since January 2007 (+6.8%).

Drivers saw a 2.8% rise in the cost of operating their vehicles between June 2006 and June 2007, partly the result of higher gasoline prices compared to 2006 levels.

The rise in gasoline prices tapered off somewhat. In June, prices were only 1.7% higher than in June 2006, compared with an increase of 5.8% in May. Automotive vehicle parts, maintenance and repairs (+4.0%) also contributed, to a lesser extent, to the change in vehicle operating costs.

Consumers had to spend 2.3% more for restaurant meals and 3.4% more for food bought in grocery stores in June. The increase in prices for food purchased in stores was largely attributable to meat (+4.6%) and dairy products (+3.7%).

The growth in these components was partly offset by the downward trend in prices for computer equipment and supplies (-17.3%) and video equipment (-9.5%).

Consumers also had to spend less for their clothing. Prices for men's clothing were down 2.7%, while those for women's clothing decreased 2.1%.

Alberta and Saskatchewan residents are hit most by price increases

Consumer prices were up in all provinces and territories between June 2006 and June 2007. However, only two provinces posted increases higher than the national average of 2.2%: Alberta (+6.3%) and Saskatchewan (+3.2%).

In Alberta, the average increase was largely the result of a gain (+15.8%) in the costs for owned accommodation. This was also the case in Saskatchewan, where costs for owned accommodation rose 12.7%.

Growth in replacement cost in Saskatchewan (+31.8%) surpassed that of Alberta (+23.6%) for the first time since September 2005.

The main factor in Saskatchewan was the increase in prices for new houses, sustained by strong employment growth. Growth in the employment rate in Saskatchewan has surpassed the national average from August 2006 to May 2007.

The most moderate growth in prices during this period was observed in Newfoundland and Labrador (+1.4%). Still, this rate of growth was double the 0.7% increase posted in May. The biggest factors in that province's CPI increase were the cost of owned accommodation (+2.6%) and gasoline (+3.3%).

Month-over-month: Gasoline prices main contributor to decline in the CPI

Declining gasoline prices were the main contributor to the 0.2% decrease in the all-items CPI between May and June 2007. Gasoline prices fell by 4.1% during this period, the fastest decline since October 2006. In contrast, gasoline prices were the main contributor to the increase in the CPI between April and May, when they rose 5.5%.

June's decline in gasoline prices was the result of a number of factors, including a recovery in capacity utilization rates at refineries following the completion of maintenance tasks that had affected the supply in May; an increase in inventories, although they were still below the average of the past five years; a reduction in retailers' margins; and the settlement of a labour dispute in Nigeria.

A 4.0% slide in the clothing component between May and June 2007 also contributed to the monthly decrease in the CPI. During this period, prices for women's clothing declined 4.3%, while those for men's clothing declined 4.5%. Changes of this magnitude are common at this time of the year when retailers generally hold promotional sales to reduce their inventories to make room for the following season's collections.

Consumers paid 0.3% less for purchased vehicles in June than in May as dealers offered discounts to reduce inventories.

Energy costs associated with housing moderated the decline in the CPI between May and June 2007. The natural gas index rose by 3.9%. This growth was particularly pronounced in Alberta. Electricity prices increased 1.6%, the fastest growth rate since November 2006.

Homeowners' replacement costs climbed 0.8% on a monthly basis, the fastest increase observed since September 2006

CIGI Distinguished Fellow John Whalley, Venice International Universty (CESinfo)
John Whalley

Speech Venice - Conference on Re-inventing Europe. Tuesday, July 17, 2007.John Whalley

It is my great pleasure to be with you this evening, among such wonderful surroundings, with such wonderful company, and to be among friends and back in Europe, even though that is where I am originally from. Tonight I have been asked to make some remarks about the global environment and circumstances in which attempts over the next few years and decades to reinvent Europe are to take place. Reinventing Europe is a project which both celebrates and builds on the 50th anniversary of the Treaty of Rome, and the ongoing forward looking European adventure on which we are all embarked.

Tonight, I am asked to give a short speech drawing together some themes which may be of some interest to those contemplating this re-adventure. But I am also a Canadian, and having been in Canada for over 30 years I have become used to the Canadian tradition with these forms of speech. Because we often have such a wonderful dinner, which we very much enjoy, when we sit down for the speech, some people in audience sometimes feel so disposed to get a little sleepy and so you have to keep them entertained. And so these Canadian dinner speeches usually have three distinct components. First, there is a little joke to start things off and to keep people on their toes, give them a little bit of entertainment, and this goes nicely with the wine. And then there is a serious bit in the middle which you are not meant to make too long, but in it communicate your main points, and finally there is a little uplifting bit at the end so that everyone goes home with a nice feeling and feel they have enjoyed themselves even beyond the dinner.

Let me begin with the jokes. Now there are not many jokes in Canada. In fact, I've got a good English friend who lives in Canada and he told me the following joke. He said how many Canadians does it take to change a light bulb? I said don't know and he said 1. And I said, just one, well that's not very funny. He said That's because there are no jokes in Canada, its boring. Its not really, it's highly entertaining, even though that's a view that a lot of people have. When you look at the tradition stemming from of Marshall McLuean, Glenn Gould, Pierre Trudeau and many other forward thinking people, with sharply different views of the world it is really quite an interesting place. Anyway that is one joke.

The second joke is one which my son loved when he was about 4 years old. I used to say to him, "What do you call a deer that has no eyes?" and he would look at me and say "No Idea", and I'd say that's right, it's a no idea, and we don't have any idea and most people would start to laugh. Another joke is "Why did the chicken cross the road" and the answer is, "it went to see Gregory Peck". Why did the chicken cross the road again? It didn't cross the road it got stuck in the middle. Why? Because it was Rhode Island Red. You see in Rhode Island they have these chickens called Rhode Island reds and it got stuck in the middle because it was a Road Island Red. Now if any of you with Hegelian orientation don't find these jokes funny it is because you have figured out the logic in all and it is clearly lacking. So now then let me move on to the substantial part of all this entertainment, and get serious and somber.

Here we are 50 years on from the Treaty of Rome, with the wine lakes and the butter mountains and the Common agricultural policy, the Euro, and all the wonderful things that are Europe. And the question now is, "How do we re-invent Europe?" How should it change from 50 years ago. Well, let me tell you a tale. A couple of weeks ago I was in London at the LSE bookshop and I went all through their bookshelves, both their new and second hand selections. And they have this whole section on European integration. And some of these are meant to be forward looking, and they are looking forward to how Europe may be in the next 20-30 years given what's happened with the Euro and all the rest of it. They are dealing with all sorts of topics to do with enriching the legal structure, changing labour relations and laws, and wage setting and so on. Nothing that I could see in about 10-15 of these books had any mention of some obvious things that are going on around Europe.

But today we have for example, global environmentalism and global heating. James Lovelock tells us we are going to be fried in a 100 years, we have potential desertification in Africa. We have India and China rapidly growing, China at 11% a year, India at 9% a year. We have technological change being spurred by global competition, swirling all around us. So how can these pieces just talk about changing a few wage legislation pieces here and there to re-invent Europe? It's like talking about Hamlet without the Prince. Put another way, we have spent 50 years having Europe integrate into itself. The next 50 years seemingly will have to deal centrally with how Europe integrates into the world, and how the world accommodates a re-invented Europe. The interrelation between Europe and the world, will in my opinion, be the central issue in all discussion in European integration in the next 50 years, not Europe's re-invention of itself.

Now if that isn't far reaching enough for you in a dinner speech, let me also put this into a bit more context. Let's take a couple of issues. Let's begin with the global environmental situation and the global component. Take global warning, what James Lovelock calls global heating. Well the first thing to note is that there is a huge disagreement between the earth scientists and the econometricians which we have amongst us as our economist friends. The earth scientists portray a picture of terrifying gloom that the earth is surrounded by the Gaia layer, with an environmental catastrophe on our hands, partly our own doing but also partly caused by the warming of the sun.

The Lovelock scenario involves Gaia, the organism of the earth, surrounded by a hitherto self-regulating environmental layer which is in rapid decay and unable to regenerate itself as it has done for 3 billion years. The Lovelock scenario is that, within a 100 years, civilization as we know it will barely survive, with a few people left at the Antarctic poles. A temperature rise of 5°C will occur within 100 years, a major sea level rise, desertification, social disruption and human kind will barely survive. He predicts a hundred thousand years will be needed for the regeneration of our civilization.

Lovelock has been working in this area for 40 years, he is a very serious scientist, he is a fellow for the Royal Society, and he has received many international awards. His books are written with care and with compassion and with thought and these are not radical views among earth scientists. They are views that, in my opinion, should be taken seriously.

What does all this imply for Europe and its re-invention over the next 50 years? Well, to me, it first implies that even if Lovelock only has a 2% probability of being right, this issue will dominate global economic and political debate in the next 20-30 years. We simply have to constructively think through what we do.

And the amazing thing to me is where we are in our thinking because to me, it is extraordinarily rudimentary. We have proposals on the table form the EU to go to deeper and deeper cuts on emissions, 20%, maybe by 2020, maybe to 30% if other countries match. There are to be serious discussions in the G8 on 50% reductions in carbon emissions by 2050 (Lovelock has called for an immediate cessation of all use of fossil fuels). Proposals from Chancellor Merkel are for sufficient reductions in carbon emissions to be imposed to maintain a target of temperature change of no more than perhaps 2°C.

The earth scientists have found that even within their own community there are criticisms. Most of these scenarios are generated by simulation models and as someone who has worked on calibrated general equilibrium models, I know how sensitive all of these model analysis are to parametric specifications, underlying structural form and key simple assumptions. Even in global circulation models, the ways in which cloud formation is treated as endogenous in their structures can make major differences to the scenarios. But we come back to the same point. What do we do in light of all of this? Do we simply commit to deeper and deeper cuts? My answer is no. We need to do more, much much more. And Europe both should be and will be centrally involved in this.

What we need in my view, first, is recognition is that we need to today to commit ourselves to contingent actions depending upon circumstance, rather than commitments to definitely act independently of what happens. The difficulties in carrying out those negotiations are so large and their complexity is such that today we need to agree to mutually act in various ways if things should happen in the hope that they do not. For instance, we could have commitments now on deeper carbon emission cuts depending on actual temperature change. Admittedly, its 50 years for some of these emissions to rise into the upper atmosphere, but we can make joint commitments today as to what our actions are, and its our actions which will be important, if needed and we simply have to be prepared to act jointly and swiftly together if needed. If we have desertification in Africa, we will potentially need to move millions of people across borders. Where countries are poor and small and geographical borders run parallel to each other in small narrow countries this will not be easy. The potential scope of change may well involve social engineering on a scale we have never even contemplated. None of these countries, poor as they are, will agree to admit the refugees unless there are major commitments from the OECD and other nations made in advance. Current aid flows from the OECD, which in the case of the US, are running at maybe 0.2% of GDP, maybe in the case of the Scandinavians at 1% of GDP. Much of the aid is tied. Who knows what the aid flows are that we would need to deal with catastrophic events accompanying global warming; perhaps 10-15% of GDP. Major discussions and negotiations should start now on dealing with these contingencies and Europe can be in a position to lead these discussions. The whole global structure of finance, redistribution, trade, aid, and much more will become embroiled in it. The reinventing of Europe in these areas seemingly must involve international leadership in global environmental policy which is already reshaping the global economic order, but much more will follow; contingent redistribution and burden and risk sharing around the globe.

Let me mention another dimension of the same issue; the threat of significant sea level rise. Bangladesh could be awash and flooded even with a 5 foot sea level rise. Bangladesh as a country as we know it could disappear with extreme sea level rise. Insurance markets, as currently organized, cannot cope with such a contingency. In some countries there are restrictions that the value of insurance policies issued in terms of liabilities cannot exceed the assets of the companies. We are talking about major global catastrophic country to country risk and its insurance. Financial innovation will be needed and maybe market mechanisms can cope. Maybe this will involve the issuance of global flooding bonds. Bonds where the payment is contingent on very precise measurements of sea level rise in certain locations and certain dates. Maybe we have global heating bonds. Global financial markets will likely evolve and change in ways which involve sensible diversification of risk.

And so the dominance of global environmental issues and planning for potential catastrophes' of global events could dominate the landscape even of a re-invented Europe over the next 30 years. The earth scientists propose technological fixes. Deep earth satellites between the earth and sun, with movable reflective panels, which Lovelock describes as sunglasses for the earth; effectively a technological fix for global warming. Silicone which would be injected into airplane fuel and when discharged when planes fly around the earth, would change the earth's reflectivity.

The costing of initiating these has not been done. How burden sharing would operate, independently of whether or not the fixes would work remains unanswered. All of this represents a major challenge for re-inventing Europe. These then are one set of global issues in re-inventing Europe. Let me now turn to another set of issues which arise with the growth of India and China and a world increasingly divided not between developed and developing countries, but between growers and adjusters. This is as witnessed by what has happened with trade restrictions against China in textiles and apparel in recent years.

The growth process in India and China is clearly dynamic, even though there are major issues of measurement in trying to figure out exactly what thier growth rate is. I was recently in China and was talking to people in Beijing and they indicate to me that there had been a 30% increase in contributions to public pension plans in the last year to 18 months. And I said well if they had gone up by 30%, I am also told that imports and exports have gone up by 30%, that all enrollments in graduate and undergraduate programs have gone up by 30%. I asked, how can all of the sub-aggregate industries be going at a rate of 30% when aggregate growth is only at 11%?

The person I was speaking with was a very prominent economist in China and he said they had made their own measurements and they thought the growth rate in China last year was really 36%. I said you are joking and he said we joke not. But later that same day, there was another economist who tried to convince me the growth rate last year was closer to 0%. We do not know what the growth rate is, but it is clear that from visits to China there is dramatic change which is taking place. In education, in pensions, in trade, urbanization - everywhere there is huge change. The dimensions of these changes are, in my opinion, major and the process is still in its infancy. Foreign Invested Enterprises (a legal form which embodies foreign direct investment venturing in China), accounts for perhaps 60% of China's imports and exports, close to 25% of the overall GDP but only 3% of employment. The transfer of labour from traditional rural areas and relatively inefficient state owned enterprises, whose productivity (and profitability incidentally) is improving rapidly in the case of telecom, banking and oil and gas, could continue for decades. These FIEs then can thus continue to receive huge amounts of further labour transfers and the trade penetration of China can continue if the absorptive capacity of the OECD continues.

Another statistic, cumulative foreign direct investment into China since 1985 maybe runs at 600 billion dollars. If you evaluate the capital stock of the OECD and make a rough calculation that the OECD GDP is perhaps 25 trillion dollars, using a capital output ratio of 3 to 1, then you would have a capital stock of the OECD of maybe 75 trillion dollars. Not all of that is on wheels, but if only 600 billion have moved thus far to China we are again in the early stages of movements there.

Now many people have argued that the growth of India and China is not sustainable. There are environmental issues, there are issues of non-performing loans, there are issues of growing inequality, and many of these issues have been discussed by Western scholars. My own opinion is that the growth will continue because it has deep roots in the social structure in China and we could discuss these potential interrupters of growth more. The potential for global change from India and China is especially dramatic in the area of autos. Chrysler is now in a joint venture with Chery, which produces a small car in China called the QQ, which is produced for $4000. Some claim it will eventually be comparable to the Hyundai Accent. Once it passes safety standards it could have a huge impact on the North American market and European markets in Autos. There is a discussion of a relocation design capability of North Americans autos, particularly Ford, moving from the United States to China. All these and other changes are dramatic and, in many ways, accelerating.

Even more dramatic is the case of India. By 2030, India may have 1.6 billion people, double that of China. Wage rates in India are one half or less than those in China. Tara Motors now have a subcompact car which may be comparable to the Chinese QQ, which sells for $2000.

The penetration that has taken place into the OECD economies in terms of trade from China has largely taken place in labour intensive manufactures, such as textiles and apparel. These have partly displaced imports coming in from the US, from Brazil, Mexico, Turkey, and elsewhere. With quality upgrading in trade and a movement of future export trade by China into autos and electronics, the adjustment consequences may thus fall increasingly on products more centrally produced in the OECD. In addition, the growth rate of trade of 30% will apply to an ever-larger base. Currently, China has 8% of world trade. In 2 ½ years it will be 16%; in 5 years it will be over 30% of world trade with these current growth rates. The internal adjustment consequences may be troubling for policy makers in some of these countries.

In Canada where I am from, the auto and financial industries are the largest and major industries in Ontario, the largest province. Already, house prices in the west - in Calgary and Edmonton - have increased by 50% in a year due to the global oil and gas situation. Major adjustment consequences, leveled directly at Ontario which account for 90% of Canada's exports of manufactures, and 35% of Canada- US trade in auto supplies may be major.

And how this is dealt with by policy makers will become central. One issue is whether it is simply a matter of relying on the magic of the marketplace. Whether the political pressures for intervention will become overwhelming as the global economy divides more and more into adjustors and growers will be an issue, as we've seen in textiles and apparel with the spread of initial US and EU measures against China to countries such as Peru, Brazil, Mexico, and Turkey.

My friends, the challenge I emphasize in my speech tonight is that in re-inventing Europe over the next few decades we need to recognize that the global context within which future European integration will take place is potentially key, as will be the increasingly important role to be played by discussions of Europe's interaction with this rapidly changing world.

All I have done is pose some issues. There are no magic solutions. I believe the way forward is to brutally recognize the realities of accelerating and escalating global change, and the potentially massive shifts which are to take place in our global structure. What we are to do about them will be the challenge of our lifetime, and what Europe does (if anything), the challenge for Europe.

This is the serious bit of this speech and if you are still awake, I will conclude with the uplifting part. And the uplifting part is a song and the song goes like this:

Happy birthday to you,

Happy birthday EU

O Europe, O Europe,

May God's blessings fall on you.

Exports fell 1.2% to $39.9 billion, largely the result of declines in automotive products and, to a lesser extent, in agricultural and fishing products, and forestry products. Exports have hovered around the $40-billion mark since December 2006. In constant dollar terms, exports fell to $37.9 billion.

Imports declined 1.4% to $34.1 billion in May, despite robust growth in energy products. In constant dollars, imports rose slightly to $39.2 billion.

Canada's trade surplus with the United States narrowed to $7.8 billion in May from a revised $8.1 billion in April, as exports to Canada's largest trading partner dropped at a sharper rate than imports.

Elsewhere, the value of imports from countries other than the United States declined, as did the value of exports to those destinations. The decline in imports was twice that of exports, and the deficit with these countries narrowed to $1.9 billion.

Exports decrease despite record high in industrial goods

Declines in exports of automotive, agricultural and fishing, and forestry products eclipsed record-high exports of industrial goods.

Since the spike registered in December 2006 and the subsequent more moderate increase in March, exports of automotive products have declined. In May, exports for this sector fell 5.8% to $6.4 billion. Passenger autos fell 6.6% to $3.2 billion, registering the largest decline in value and reaching its lowest level since August 2006. Trucks and other motor vehicles decreased 7.3% while motor vehicle parts declined 3.7%, the first decrease since January.

Exports of agricultural and fishing products declined 6.9% to $2.8 billion as wheat plunged 34.1%, offsetting April's increase. Exports of live animals also decreased, although Canada resumed exporting to Russia in May for the first time since the bovine spongiform encephalopathy crisis halted exports in 2003. Live animal exports have been gradually increasing as more countries ratify agreements to accept Canadian cattle.

Forestry products declined 3.8% to $2.5 billion as lumber products registered the largest decline. Exports to the United States continue to account for the majority of Canadian exports of lumber products. These exports continue to be affected by low prices and persistent weakness in the American housing market.

Rising for the third consecutive month, exports of industrial goods set a new record high of $9.2 billion on the continued strength of chemicals, plastics and fertilizers. The main contributor to this increase was inorganic chemicals, fuelled by the growing demand for uranium.

Energy products edged up 0.6% to $7.8 billion as petroleum and coal products rose for the fourth consecutive month, increasing 12.4% to a new record high of $1.6 billion. The majority of the increase was due to a rise in volume.

Increased demand for aircraft, engines and parts from Canada's aerospace industry pushed exports of aircraft and other transportation equipment up 16.7% to $2.1 billion, the highest level since February 2002. This jump translated into a 1.8% increase in machinery and equipment exports, which reached $8.3 billion.

Imports fall for the second consecutive month

Strong growth in energy imports failed to offset the declines registered by most sectors in May. Automotive products and other consumer goods led the decrease.

Imports of automotive products dropped for the second consecutive month, down 5.4% to $6.5 billion. Motor vehicle parts registered the largest decline (-5.5%), falling to just below the $3-billion mark for the third time since 2001. Imports of passenger autos also declined, down 7.3% to just under $2.0 billion. Trucks and other motor vehicles fell 2.3%, the first decrease in five months.

Imports of other consumer goods contracted for the second month in a row, declining 5.7% to $4.4 billion. Imports of watches, sporting goods and toys led the drop as these commodities returned to previous levels following the record increase in April.

Industrial goods and materials imports fell 3.4% to $6.9 billion. Metals and metal ores registered the largest decline (-5.0%) in this sector after inching up in April. Chemicals and plastics declined for the fourth month in a row.

Machinery and equipment fell 1.0% to $9.5 billion. Aircraft and other transportation equipment increased 1.6% as airline companies expanded their fleets. However, these increases were overshadowed by declines in imports of office machines and equipment, industrial and agricultural machinery, and other machinery and equipment.

Agricultural and fishing products edged up 0.3% to $2.1 billion. The rise was concentrated in imports of fruits and vegetables, as the seasonal demand for fresh fruits and berries was particularly strong.

Imports of energy products jumped 11.3% to $3.2 billion after decreasing in April. Both crude petroleum and other energy products contributed to the rise. For crude petroleum, the bulk of the 16.8% rise was due to a surge in volume, even though both the price and volume increased. Coal and other related products, which fuelled the increase in other energy products, rose for a second consecutive month.

Merchandise trade
	April 2007r	May 2007	April to May 2007	May 2006 to May 2007	January to May 2006	January to May 2007	January–May 2006 to January–May 2007
	Seasonally adjusted, $ current
	$ millions		% change		$ millions		% change
Principal trading partners
Exports
United States	30,488	30,180	-1.0	2.3	151,651	153,139	1.0
Japan	1,005	962	-4.3	19.5	4,198	4,685	11.6
European Union1	3,746	3,531	-5.7	30.0	12,841	17,446	35.9
Other OECD countries2	1,955	2,069	5.8	52.9	6,373	8,846	38.8
All other countries	3,240	3,213	-0.8	24.5	12,984	15,968	23.0
Total	40,434	39,954	-1.2	8.1	188,045	200,085	6.4
Imports
United States	22,435	22,405	-0.1	5.8	108,066	112,935	4.5
Japan	974	912	-6.4	-11.1	4,917	4,966	1.0
European Union1	3,646	3,659	0.4	-3.2	17,122	18,040	5.4
Other OECD countries2	1,922	1,688	-12.2	-16.1	9,681	9,935	2.6
All other countries	5,552	5,392	-2.9	7.1	24,808	27,499	10.8
Total	34,529	34,056	-1.4	3.1	164,593	173,375	5.3
Balance
United States	8,053	7,775	...	...	43,585	40,204	...
Japan	31	50	...	...	-719	-281	...
European Union1	100	-128	...	...	-4,281	-594	...
Other OECD countries2	33	381	...	...	-3,308	-1,089	...
All other countries	-2,312	-2,179	...	...	-11,824	-11,531	...
Total	5,905	5,898	...	...	23,452	26,710	...
Principal commodity groupings
Exports
Agricultural and fishing products	3,026	2,817	-6.9	12.7	12,788	14,580	14.0
Energy products	7,759	7,807	0.6	5.0	36,524	38,255	4.7
Forestry products	2,610	2,510	-3.8	-9.0	14,456	12,989	-10.1
Industrial goods and materials	9,153	9,181	0.3	23.7	36,320	44,278	21.9
Machinery and equipment	8,125	8,271	1.8	9.4	38,960	41,234	5.8
Automotive products	6,815	6,420	-5.8	-3.6	35,543	34,152	-3.9
Other consumer goods	1,658	1,640	-1.1	15.6	7,080	8,223	16.1
Special transactions trade3	745	693	-7.0	-0.1	3,615	3,611	-0.1
Other balance of payments adjustments	543	614	13.1	22.1	2,759	2,762	0.1
Imports
Agricultural and fishing products	2,109	2,115	0.3	11.3	9,439	10,594	12.2
Energy products	2,878	3,204	11.3	9.2	13,748	14,395	4.7
Forestry products	249	251	0.8	-1.6	1,271	1,267	-0.3
Industrial goods and materials	7,105	6,863	-3.4	-2.8	34,520	35,532	2.9
Machinery and equipment	9,576	9,479	-1.0	1.0	46,827	48,634	3.9
Automotive products	6,818	6,453	-5.4	2.7	32,514	33,938	4.4
Other consumer goods	4,690	4,421	-5.7	5.0	21,175	23,193	9.5
Special transactions trade3	426	613	43.9	71.7	1,787	2,444	36.8
Other balance of payments adjustments	677	658	-2.8	2.8	3,314	3,374	1.8
r revised ... not applicable 1. Includes Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom. 2. Other countries in the Organisation for European Economic Co-operation (OECD) include Australia, Canada, Iceland, Mexico, New Zealand, Norway, South Korea, Switzerland and Turkey. 3. These are mainly low valued transactions, value of repairs to equipment, and goods returned to country of origin.

Note to readers

Merchandise trade is one component of the current account of Canada's balance of payments, which also includes trade in services.

International merchandise trade data by country are available on both a balance of payments and a customs basis for the United States, Japan and the United Kingdom. Trade data for all other individual countries are available on a customs basis only. Balance of payments data are derived from customs data by making adjustments for items such as valuation, coverage, timing and residency. These adjustments are made to ensure the conformity of the data to the concepts and definitions of the Canadian System of National Accounts.

At the end of each quarter, The Daily includes a section describing trends and topics of interest relating to the Canadian international merchandise trade. This section typically discusses data presented on a customs basis and not seasonally adjusted.

Revisions

In general, merchandise trade data are revised on an ongoing basis for each month of the current year. Customs basis data are revised for the previous data year each quarter.

Factors influencing revisions include late receipt of import and export documentation, incorrect information on customs forms, replacement of estimates with actual figures, changes in classification of merchandise based on more current information, and changes to seasonal adjustment factors.

Revised data are available in the appropriate CANSIM tables.

Statscan - Output levelled off in April 2007, after three consecutive gains, hampered in part by labour disputes. Employment growth resumed in June, after a two-month pause, as gains in services outweighed more losses in manufacturing.

The economy continued to be influenced by gains in commodity prices and the exchange rate. Food and energy prices continued their upward trend, while metals remained near their historic highs. Partly as a result, the Canadian dollar posted its second fastest quarterly increase ever, just under 7%, hovering near a 20-year high in May and June.

These shifts in relative prices continued to resonate throughout the economy. The stock market remained near its all-time peak. Export earnings of most commodities continued to grow, led by metals. Mining output was checked by labour disputes, after strong growth in recent months (non-metallic minerals have expanded by nearly a third in the past year). The investment boom in resources helped buttress manufacturing output in recent months against weak export demand, especially for lumber and autos.

Higher food and energy prices pushed up consumer prices, led by a 26% hike in gasoline prices since January. The jump in gasoline prices did not deter its consumption, which jumped 4.2% in April, its largest monthly increase in over two years. After a slow start to the year, when a cold snap discouraged motorists from venturing out, gasoline demand in April was 3% ahead of last year's pace.

Quebec's 6.9% unemployment rate was the lowest on record back to 1976, down over a full point from 8.0% in June 2006. At 0.4 percentage points, the gap between Quebec's 6.9% rate and Ontario's 6.5% rate was the smallest ever recorded. Before 2007, the smallest gap was 1.1 points, observed late in 2002.

With comparable labour force growth in both provinces, the convergence of the unemployment rates reflects the strong job gains of 2.4% in Quebec since June 2006 (all in full-time employment) and the growth slowdown to 0.9% in Ontario.

Growth in Quebec was led by household spending, partly fuelled by one-time pay equity settlements of $1.3 billion dispersed in the spring. Both provinces have lost numerous jobs in manufacturing and forestry.

Moderate Profit Expectations

On the issue of profit expectations over the next 12 months, only 22 percent of executives anticipate increases. Executives engaged in the non-durable goods industry are the most optimistic, with 18 percent expecting profits to increase. Executives in the durable goods industry are a close second, with 11 percent anticipating a rise in profits.

Among chief executive officers who expect profits to increase, 46 percent believe technology will drive profits up, while 29 percent cite price increases as the main source of improvement. Only 17 percent foresee market/demand growth as a driver of growth and the remaining 8 percent cite cost reductions.

“South American producers have made significant investments in silviculture and production facilities in recent years,” said Bruce McIntyre, leader of PwC’s Forest, Paper and Packaging practice in Canada. “This is especially apparent in the pulp sector where low-cost fibre has propelled the region into the forefront as a key supplier of market pulp. North American and European producers are facing stiff competition in some of their traditional markets.”

South America possesses the richest forest resources on the planet, with 21% of the global forest area, totalling 832 million hectares. With generally a favourable climate, fertile soil and abundant land, the continent has some of the lowest wood fibre costs in the world. Low wood costs have become a prime competitive advantage in world markets for globally traded forest products, particularly in pulp. Although home to an array of tropical hardwoods, commercial interest arises from plantation forests.

Regionally, Brazil dominates the sector. Its total industrial roundwood harvest of around 120 million cubic metres annually represents almost 70% of the region’s total. Chile follows with almost 20%. Highly competitive wood costs, combined with advanced fibre technology and the latest processing technologies, have built strong wood product and pulp industries. Data from Resource Information Systems Inc (RISI) shows that in Q4 2006, Brazil ranked second to Indonesia as the lowest cost producer of bleached hardwood kraft pulp, with Chile in third place. Brazilian hardwood pulp manufacturing costs were some 22% lower than those in the US.

A few non-South American companies – such as Stora Enso, Botnia and International Paper – are looking to share in these advantages. McIntyre noted that, “with high costs and other constraints in traditional Northern Hemisphere producing regions, and with a fibre shortage expected to continue in Asia, more of the largest pulp and paper companies should consider investing in pulp production in South America to remain competitive. Foreign investment is welcome in the region”

South America has enjoyed increasing economic and political stability. The most recent data from the International Monetary Fund (IMF) shows that the region recorded real growth of 5.6% in 2006, just ahead of global growth of 5.4%. With a population of 377 million, the region’s GDP per capita (roughly US$5,000) is still a fraction of that in developed countries. However, with its mainly urban economies and with rising disposable incomes, the region is likely to see a rise in per capita consumption of paper and paper board from the current relatively low levels, presenting further investment opportunities.

McIntyre added that in many South American countries the forest products sector is a growth industry, attracting strong interest from the labour market. At PwC’s recent annual Global Forest and Paper Conference in Vancouver, one of the speakers, Jose L.D. Penido, CEO of Votorantim Celulose e Papel S.A. (VCP) in Brazil, noted that his company recently received approximately 20,000 applications for 150 job openings.

Harnessing South America’s paper and packaging potential also comes with challenges. There are macroeconomic and social development issues, as well as regulatory, government and infrastructure barriers which present risks that counter the several obvious advantages and which, taken together, have acted as a brake on the region from realizing its economic potential.

High taxes and interest rates are also impacting productivity and growth. The World Economic Forum’s most recent Global Competitiveness Report placed Brazil 66th out of 125 countries, below Russia, India and China.

To obtain a copy of the 48-page report Risks and Rewards: Forest, paper and packaging in South America, please visit: www.pwc.com/fpp. To arrange an interview with a PwC spokesperson to discuss the findings of the report, please contact Jim Nelson, PwC, (604) 806 7047, jim.nelson@ca.pwc.com, or Carolyn Forest, PwC, (416) 814 5730, carolyn.forest@ca.pwc.com.

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 140,000 people in 149 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. Now celebrating 100 years of excellence in Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 4,700 partners and sta