THE BOTTOM LINE: Export outlook gets a boost

by Canadian Shipper

Last spring, EDC Economics was forecasting no growth in Canada’s exports for 2007. Recent developments are leading us to upgrade this outlook modestly.

At the heart of the story is a forecast moderation in global economic growth, led by an abrupt slowdown in the U.S. economy. Evidence of a global moderation is accumulating – the U.S. consumer is retrenching, leading economic indicators have rolled over, Asian exports are easing, and financial markets are being driven increasingly by speculation.

Yet, there is no denying the signals indicating that the world economy remains strong. Prominent among these is the price of oil. Political and other supply tensions notwithstanding, it is clear that demand remains strong and that excess capacity is building only very gradually, as prices are up over $20 in six months.

On top of this, EDC’s latest survey of Canadian exporting companies shows that trade confidence has actually improved during the last six months. The Trade Confidence Index has risen to 72.9, up from 71.4 six months ago and 70.7 last year. The survey indicates that companies have become slightly more bullish on both foreign and domestic economic conditions.

Of course, this positive sentiment is far from universal, as the sectoral breakdown of trade confidence continues to show a two-track economy. Confidence is up in energy, metals, technology and transportation, while light manufacturing is stagnant and forestry has deteriorated further. The overall rise in the index, therefore, means that the strong sectors are simply outweighing the soft ones.

It is likely to be several more months before evidence of slower global growth becomes truly compelling. Meanwhile, the world’s central banks need a slowdown to reduce the risk of future inflation, and that means some upward pressure on interest rates and some currencies.

This includes the Canadian dollar, which has been pushed higher by speculation that both interest rates and oil prices will continue to move higher. Assuming the anticipated synchronized global moderation emerges in the second half of the year, and oil prices ease toward the $60 level, then the dollar could trade down toward the mid-80s. However, were oil prices to approach the $90 level, the dollar could inch up towards parity with the U.S. dollar.

These changes to the outlook mean that Canada’s export revenues are likely to grow by 2-3% this year. Even so, the export upgrade is almost all due to higher prices for energy, metals, petro-chemicals and fertilizers. Excluding those categories, other export sectors will be in decline.

The bottom line? A slightly stronger global outlook means an upgrade for Canada’s export revenues. But the upgrade is mainly due to higher prices, which means that the risks associated with the outlook are increasing, not falling.

Stephen Poloz is Senior Vice-President, Corporate Affairs and Chief Economist, Export Development Canada.

Have your say

We won't publish or share your data