The first week of 2016 was disastrous for global equities, with trouble in China spreading. Canada's recent GDP surge, largely driven by growth in China, could now be in jeopardy.

The Shanghai Composite Index and the Shenzhen Composite Index were forced to shut down when the circuit breakers tripped on Monday, 4 January and Thursday, 7 January. On Friday, Chinese equities rallied with a 2% gain, but the damage had already been done. An estimated $2.5 trillion had been erased from global markets and everywhere from Beijing to Berlin, Paris, London, Toronto and New York felt the ripple effects. That China is again at the center of the crisis is alarming. As the world's second-largest economy, what happens in China doesn't just stay in China; it spreads and affects emerging markets and developed economies all over the world.

Commodities Rocked by China Weakness

What is particularly disturbing about the situation in China is its impact on commodities like oil, natural gas, copper, molybdenum and iron. The strength of the U.S. dollar is adding additional pressure to commodity prices.

As the dollar strengthens, by way of interest-rate hikes (like the one on December 16, 2015), it becomes relatively more expensive for other countries to purchase dollars to pay for commodities. This drives down the demand for commodities, which are already at multi-year lows. Persistent oversupply is also playing a part in low prices. Already, Goldman Sachs is forecasting the price of crude oil to drop into the $20 range. Just the other day, crude oil broke through the important psychological barrier of $32 per barrel, with support levels collapsing at every juncture.

OPEC will soon have to make hard decisions about whether it wants to see crude oil prices continue to slip or to arrest these declines and cut production to allow prices to rise. The war of attrition between WTI crude oil producers and OPEC is a protracted one that can take several years to achieve OPEC's overall objective of diminished supply. However the number of shale oil rigs in operation in the U.S. is already steadily decreasing and this is leading to an interesting set of circumstances. With U.S. production down, the low-cost oil producers are taking over the market share of the higher-cost (and smaller) producers, but this is merely a short-term solution to a long-term dilemma. Oil inventories are declining, but still substantially higher than they ought to be. Low oil prices have a disinflationary effect on the global economy which is causing central banks to enact policies of quantitative easing to accelerate the velocity of money flow to increase prices, employment and overall economic activity.

Potential Economic Policies in Canada and Their Repercussions

And this brings us to Canada.

At the height of the global economic crisis, Canada's GDP grew 13% from 2010 to 2014. The growth rate, although strongly positive, was driven by China's strength. Now that China's economy is no longer booming and OPEC has brazenly disregarded demand-supply constraints, low oil prices are hitting the Canadian economy, which is so dependent on exporting the commodity. The new liberal Canadian government is relying on the housing boom to keep the economy above water. But this is a dangerous precedent, as seen by the U.S. housing crisis which led to the global economic collapse back in 2008 and 2009. Without underlying economy growth to support it, the Canadian housing boom could be a bubble; to be sure, strong population growth in Canada is also part of the reason housing stock has grown by seven percentage points.

But can Canada sustain its economic growth in a period where oil prices are low, global GDP is slowing and emerging markets are under the gun?

The Canadian currency has already slumped precipitously on the back of plunging oil prices. The USD/CAD currency pair is trading at over 1.41, and binary options traders in Canada are propelling this bearish sentiment with substantial put options on the CAD. The Bank of Canada is considering negative interest rates, but one wonders whether decreased rates would do anything at this juncture. The Canadian government must instead focus its energy on growing businesses and expanding its own Silicon Valley in a way that bodes well for the prosperity of the nation. The recession may bring about optimization of resource allocation, with price efficiency. Time will tell.

Brett Chatz is a graduate of the University of South Africa and holds a Bachelor of Commerce degree, with Economics and Strategic Management as his major subjects. His expertise is in spread betting and CFD trading companies.