Canadian exports rose by 1.9 per cent in September as improving demand from the U.S. combined with a bumper crop and rising energy shipments. Agricultural exports surged 15 per cent to an all-time high of $1.8 billion. This year’s record grain harvest delivered impressive numbers last month and the increases continued in September. Canola led the charge with an 82 per cent rise in September, while wheat also increased impressively, by 8.6 per cent after a 53.8 per cent gain the previous month. Canada’s exports of intermediate food products also delivered an impressive 12.4 per cent increase.

The energy sector also shone in September with a hefty 4.2 per cent gain as oil exports rose by 9.6 per cent. This is largely a result of capacity coming back online after temporary maintenance-related shutdowns over the summer. The gains were broadly shared with Canada’s exports of metal ores surging 46.4 per cent due to a surge in shipments of iron and copper. Industrial machinery also rose 2.6 per cent thanks to solid gains in sales of logging, mining and construction machinery. The transportation sector was mixed, as automotive exports edged downward by 0.7 per cent, but aircraft increased by an impressive 19.9 per cent.

The most important growth in export destinations was the United States where exports grew by 1.3 per cent. The U.S. economy is showing increasing signs of strength with improving business and consumer confidence, rising prices in the housing sector, and solid retail sales. In fact, U.S. exports were surprisingly strong in September, rising 3.1 per cent to an all-time high of US$ 187 billion. The improving outlook in the U.S. will lead to continued growth of Canadian exports in spite of weakness in other markets. Canada’s exports to the European Union declined by 4.7 per cent, the 6th consecutive month of decline as the recession and fears over the sovereign debt crisis weighed on export demand.

Looking ahead, we expect continued strength in exports to the U.S. as the American economy improves and U.S. retailers are preparing for strong sales this Christmas season. Canada’s agriculture exports will maintain their solid performance, even though the growth should ease back from the recent staggering increases, as this year’s near-record harvest will boost export volumes through this year and into 2013. The automotive sector should also improve markedly as U.S. auto sales rose 7 per cent year-over-year in October, despite the impact of hurricane Sandy. Canada’s lumber industry should also prepare for growth as U.S. housing starts rose 15 per cent in September to 872,000, the highest level in four years. The downside risk is that American business will hold off on investment in the coming months because of concerns about the “fiscal cliff”, the spending reductions and expiring tax cuts set to take effect on January 1, 2013 and could amount to 5 per cent of GDP. Our expectation is that policymakers will reach a compromise to avert such a large fiscal withdrawal, but investment is likely to be dampened until a solution can be reached.