By R. Bruce Striegler

Twice a year, the Export Development Canada (EDC) economics team assembles data which offers a detailed analysis of what Canadian exporting companies can expect in the coming years. Called the Global Export Forecast (GEF), the spring 2016 edition suggests a promising outlook for this year and next. Despite these positive conclusions, Peter G. Hall, EDC’s Vice-President and Chief Economist says, “There’s a lot of negative news circling the globe, and it hasn’t stopped. It seems like we’ve had seven or eight years of this. The difficulty with the most recent news is that since the middle of 2014, we’ve seen an enormous tumble in a lot of different indicators out there. People in Canada are familiar with commodity price drops, but bond markets are in turmoil, currencies have been bouncing around all over the globe, and we’ve seen a tumble in stock markets.”

In EDC’s spring export forecast, the agency observes that strong demand for Canada’s manufacturing exports will lead to significant export growth in three major sectors: consumer goods with 14 percent growth, aerospace rising by 13 percent, and automotive exports increasing by 10 percent. While natural resources continue to struggle under lower prices and sluggish demand, double-digit growth in consumer goods, automotive, and aerospace sectors will drive Canada’s overall exports to grow by two per cent this year, according to the most recent global export forecast. “The market indicators are reacting to the situation in a most unusual way.” When an economy is seen to be gaining strength, leading indicators generally move upwards, but Hall points out that in this case, some of the leading indicators are moving in the opposite direction. “Many are interpreting this as evidence of global weakening,” he says.

Mr. Hall muses that the odds seem heavily stacked against growth, “It’s a wonder we’ve had any at all. Maybe that’s just the point. For the economy to heave against such odds, there must be an opposing force, and it must be substantive.” Hall notes that despite being hit by weather issues, political mismanagement, financial market turbulence, labour activity, sectoral weakness, short-term capacity pressures and other unforeseeable happenings, the U.S. economy pushes onward. Says Hall, “Pent-up demand is driving consumer spending and housing activity, spurring business investment, and creating jobs by the boatload.”

U.S. economy seen as driver of global growth

The implications of the U.S. growth says Hall, are that over the next few years, it will drive increased demand for Canadian-produced consumer goods, including housing-related articles such as furniture and household durables. Niche industries such as medical equipment will also experience export growth as an aging U.S. consumer drives higher health spending. “Canada’s export story in 2016 is, naturally, directly linked to what we’re seeing in the global economy: commodities are struggling but people’s need for homes, furnishings, and transportation to and from work is rising again.” He points out that the U.S. economy is considered the engine of the world’s economies, the one that has superior productivity growth, and says, “If anything is going to drive things forward, it is this U.S. economy.”

Mr. Hall continues, saying that as the U.S. powers up and spreads its growth to the rest of the world, it will become the main cause for Canada’s surging exports in the transportation and consumer goods categories. Rising global demand for new aircraft and related services will help Canada’s export performance he predicts. Adding the weaker Canadian dollar to the mix says Hall, will give exporters a price advantage when selling into the U.S. and certain other foreign markets, and further boost Canada’s overall export growth. He adds that other industries are not only taking off, thanks to renewed growth fundamentals – but their growth actually is being boosted significantly by weak mineral and energy prices.

Mr. Hall points to several factors pushing higher demand for Canada’s aerospace exports, including lower jet fuel prices leading to stronger margins for airlines. As a result, mainline carriers are now looking to renew and expand their aircraft fleets. According to EDC, there is also an accelerating demand for training and air crew education, which is boosting exports of Canadian-built flight simulators like those made by CAE. For the auto sector, record U.S. demand for vehicles along with the lower Canadian dollar are the main reasons for the expected 10-percent growth in auto-sector exports this year. The volume of shipments will increase now that vehicle manufacturing plants in Windsor and Oakville have resumed full production following down time for modernization and retooling.

Reason for optimism in spite of lower resource prices

“Despite what the headlines say, there are several bright spots for Canadian exporters beyond the U.S., particularly in Asian markets such as China and India,” says Hall. “Both countries will see growth of more than six per cent this year, an impressive clip given their economic size. Still, it’s imperative for exporters going into those markets to do their research first and identify areas of opportunity, while also getting a grip on risks they need to protect themselves against. There are plenty of resources to help.”

The EDC report goes on to point out that Canada is facing headwinds of its own. Lower resource prices pummeled the energy and mining sectors last year. However, the effects were almost solely on company margins. According to the export forecast, the real adjustments will come this year, as project cancellations and layoffs are expected to take effect. Mr. Hall notes that this will hit an economy with fundamentally weak housing markets in multiple cities and a consumer that is about as debt-stretched as Americans were, pre-crisis. As such, near-term domestic activity is forecast to be soft. The EDC forecast says that risk shadows mining and energy exports, although the end of the price plunge should stem the dramatic losses. Moreover, prior projects reaching the production phase will actually increase output available for export, in both the mining and oil and gas sectors.” The report notes these are a couple among a few select categories where progress was weak leading into 2016. Mineral and chemical exports ended last year down considerably from average performance during the year, and the outlook remains challenging.

The EDC Economics team reports that service exports will maintain a healthy four percent rate of growth this year driven by the weaker Canadian dollar and positive economic outlooks for Canada’s key trade partners, the U.S. and Europe. The services sector accounts for the highest share of Canadian exports and will remain among the most solid and stable contributors to overall export growth. With more than 80 per cent of costs to produce services exports sourced domestically, the weaker Canadian dollar provides competitive gains to support exports and suppliers’ margins. Although the lower currency partly reflects headwinds to economic activity and trade due largely to the plunge in energy prices, EDC expects these to recover gradually as of this year. All services export subsectors are expected to advance this year and next.

EDC’s spring forecast notes that, “Personal travel is by far the largest contributor to service exports growth, and tourism services providers will be the biggest beneficiaries of a lower currency as the number of new arrivals, particularly from the U.S., should continue to recover from recent historical lows.” The report suggests that a stronger U.S. economy should also lift services receipts from business travel. Growth in transportation services receipts have been dragged mainly by softer trade, but the positive outlook should lift water and air transport activity going forward. Commercial services account for nearly two-thirds of the bulk of total receipts in the sector. “While some of these are delivered on a standalone basis, others are either embodied in or integrated with goods exports, making the latter two types more sensitive to trends in merchandise trade.” Exports of technical and trade-related services as well as of professional and management consulting services are expected to benefit from improving trade, commodity prices and the broader economic backdrop. As well, the negative growth trend for telecom and technology services exports should reverse as U.S. companies are forced to invest to increase production capacity.

Mr. Hall says, “Growth is back, but many don’t see it. Turbulence, the fallout of lower commodity prices and pre-existing risks each loom large, and are eclipsing the growth story. It has turned into a psycho-cycle, with both stories vying for attention. Few past episodes have seen such a juxtaposition, and there are probably few precedents for what’s at stake. Growth is expected to prevail. It has thus far, and it usually does when fundamentals are as they are today.”