By Peter G. Hall, Vice-President and Chief Economist
Let’s call it as it is. Canada is hardly setting records on the international trade track these days. Far from it – we’re actually digressing. Growth surged at the beginning of the year in line with expectations, but a swift U-turn dashed those hopes, and the news has been pretty gloomy since. The upbeat outlook at the beginning of the year made sense, and still does. After all, the US economy is still powering ahead, and our dollar remains well below its post-recession average. What went wrong?
The data gyrations are dramatic. A 2-month surge through January lifted exports 5.9 per cent – the sort of payback that was expected, given how the drivers were lining up. Then a 2-month 10.2 per cent crash that made it all look like a fluke. Since then, total exports have meandered, with nothing dramatic really going on. Strip away price movements, though, and the story is more serious. The trend in physical shipments of goods has been persistently negative, almost without interruption. Worse yet, the trend is broadly-based across a number of industries. It might be some comfort if this was a bizarre change in our less-traditional market, or due to recent uncertainty in Europe. Not so; the problem is almost squarely with our key market, the US.
Does that make sense? Is something faltering down there that we didn’t initially notice? Look at the labour market, and you get a resounding ‘no’. There was a job-creation hiccup a few months back that was more of a statistical aberration, but apart from that, the US job machine has powered ahead, and is for the first time pulling in a cohort of the labour force that the recession left behind. The unemployment rate is below 5 per cent, a tight market by anyone’s standards. Housing is holding firm. Industrial production has some decent recent lift. And key categories of business investment outside the resource sector remain impressive. So with all this going on, why is GDP not looking great? Well, that high greenback is not helping the trade picture. But look closer at the data, and there’s more. In spite of the good news stateside, there was a surge of inventories. It seems businesses got a bit ahead of themselves in their purchases. Realizing this, they were able to cut orders and limit their buying activity to bring inventories back into line.
Fair enough, but that doesn’t sound like enough to rock our trade. Oh, but it is. The inventory swing knocked 1.2 per cent off annualized US growth in the second quarter, after shaving about one-fourth of that from first-quarter growth. Given America’s propensity to source goods abroad, imports can – and certainly seemed to – take a disproportionately large hit. The good news? Thankfully, inventory swings are temporary, especially in the resilient environment the US is enjoying today. How temporary? Looks like this one will be wrapped up in the third quarter. Indeed, US imports are already on a 3-month upswing. It looks like the worst of this swing may indeed be behind us.
If this really is all a temporary blip, then we shouldn’t be the only ones suffering. We’re not. South of the Rio Grande, exports aren’t ship-shape either. On a US-dollar basis, Mexico’s fob merchandise exports are also on a down-trend – almost exactly in synch with Canada’s. The only difference is that theirs isn’t as deep as ours. Why? Firstly, the peso depreciated by 30 per cent over that period, while the Canuck buck fell by just 16 per cent. Secondly, resource exports are a greater share of Canada’s total, and have wracked our bottom line thanks to plunging world prices. That aside, it helps to know that export weakness is not just a ‘Canada thing’.
Canadian exporters may end the summer break a bit more twitchy about recent results, but it looks from this vantage point that the year will end with positive momentum. Numbers stateside are already looking more positive on several fronts, meaning that beyond the inventory adjustment, there could be some serious buying going on.
The bottom line? Recent trade trends in Canada are scary, partly because of the world’s persistent wobbles, but mostly because they don’t line up with our key trade partner’s solid performance. But the data show that they maybe got a bit too exuberant about stocking their shelves, and needed to take a breather. That won’t last long, so be ready for a late-year export resurgence.
This commentary is presented for informational purposes only. It is not intended to be a comprehensive or detailed statement on any subject and no representations or warranties, express or implied, are made as to its accuracy, timeliness or completeness. Nothing in this commentary is intended to provide financial, legal, accounting or tax advice nor should it be relied upon. Neither EDC nor the author is liable whatsoever for any loss or damage caused by, or resulting from, any use of or any inaccuracies, errors or omissions in the information provided.