By Peter G Hall, Vice-President and Chief Economist
With summer in full swing, I hope you are taking time to rest, enjoy the warmth, the lake, family, good friends, a sizzling barbecue or enjoy whatever your favourite summer activities are. In all the seasonal distractions, it may have slipped your notice that Canada had a blockbuster export month in June. We just got the data last week, and are still savouring the message. It broke a pretty sluggish trend, with exports rising in 9 of 11 industries and in all except one province. It’s just one month, but even so that’s a pretty strong performance. So, where did it come from? Good question – we’re curious too.
The big story was exports to the U.S. This was a very positive surprise, because the U.S. data hasn’t been great this year. Weather, sentiment and a West Coast port strike held things back in the first quarter, and second-quarter economic activity wasn’t as sparky as we hoped for. But the U.S. wasn’t the only story; we did well in the UK, and more generally in the EU – and the results would have been even more impressive without a particularly large one-time drop in Canada’s exports to Switzerland. Even our trade with China showed improvement. Are Canada’s results signaling a pick-up in global trade, or are we simply capitalizing on a cheaper currency?
If it was just a dollar thing, I’m not sure our export performance in June would have done well outside of the U.S. Many other currencies have depreciated against the greenback over the same timeframe, nixing any direct bilateral trade benefit to Canada. Is our summer surge just a one-off, or is something more sustainable in the works for global demand?
The CPB in the Netherlands is a great go-to spot for the latest on global trade. Their June number won’t be published until later this month, so we’re stuck with prior months. The picture’s not great – they estimate a global trade contraction in May of 1.2 per cent in inflation-adjusted terms. That’s on the heels of a 0.2 per cent drop in April. By their reckoning, that’s five successive months of decline after an up-and-down autumn in 2014. That’s far from comforting; are there any signs that June might be different, that things are picking up?
The Baltic Exchange Dry Index is a gauge of shipping costs for dry bulk cargoes. It is normally a leading indicator of global trade activity, but an oversupply of ships in the aftermath of the crisis has kept freight costs unusually suppressed. That is, until very recently. Although the glut of ships is still with us, since April, freight prices have more than doubled. All classes have seen prices rise, but over the same timeframe, Capesize vessels have seen the biggest jolt, up more than six-fold since March. It’s not as if input costs are the driver here; oil prices are sinking ever lower. The movement of the Index is noteworthy; yet recall, it is rising from a prolonged visit to the dungeon. Are there any other indicators that suggest this is more than a passing blip?
Still in the shipping world, there’s another watchable gauge of activity. The Harpex Index monitors costs in the container shipping world. It, too, has been beset by the shipping glut, but has also spiked in recent weeks. The main index is up by over 50 per cent since January, its first surge after an unusual four-year lull. While it’s off its peak in recent days, the upward movement is significant, given that this time around it isn’t being fed by heaps of public stimulus spending, and it’s happening in a highly competitive, low-input-cost environment.
For both of these indexes, it is too early to tell whether the movement is a sign that things are truly picking up, or that prices are merely rising from impossible lows to a new, more sustainable level. I’d bet on the former. Momentum in the U.S. economy is undeniable, and the groundswell of near-term potential growth is at the very least compelling. A strong U.S. currency is transmitting this growth, not just to Canada and Mexico, but also to Europe. We believe key emerging markets are a very close next destination. The next few months will tell the tale.
The bottom line? There are early signals that global trade is on the move. Canada’s banner month in June may well be the first in a number of gains that are replicated around the world. Enjoy the summer, but keep an eye on global trade numbers!
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