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What's Up and Down With Canadian Exports

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Canadian exports rose by 1 per cent in October led by a stunning increase in agricultural exports. The combination of this year's bumper harvest with high global food prices was expected to yield significant gains, but many analysts were surprised by the extent of the rise in international sales.

Coming on the heels of a 10.9 per cent increase in August and a 14.7 per cent surge in September, agriculture exports shot up 20.8 per cent last month to an all-time high of $2.19 billion, the first time that monthly numbers have pierced the $2-billion level. Canola exports reached an all-time high of $608.9 million while other crops surged by a staggering 74.3 per cent to $591.4 million.

Energy exports also performed well in October, rising by 3 per cent because of a 5 per cent increase in crude oil shipments as well as a 10.1 per cent rise in electricity sales to the US. Canada's forestry exports also registered a healthy 2.4 per cent gain, led by logs and pulpwood which rose 47.4 per cent and lumber which increased 5.1 per cent due to the improving outlook for housing in the US.

On the industrial side, Canada's machinery and equipment exports rose 1 per cent on rising sales of commercial and service industry machinery which increased by 28 per cent while agricultural machinery also rose 4.6 per cent. Finally, electronics exports also had a strong October with a 2.3 per cent increase driven by a 3.7 per cent rise in sales of computers and peripherals, alongside a 4.6 per cent increase in communications equipment.

Unfortunately, a large part of these gains were off-set by a huge decline in exports of metals, which dropped by 37.6 per cent in October. These numbers are highly volatile due to the timing of shipments, and were caused by a 51.7 per cent decrease in iron ore, and a 37.7 per cent fall in copper shipments. Significant declines were also seen in chemicals which fell 8.9 per cent and in aircraft exports which declined by 14 per cent after two months of large increases.

In terms of export destinations, Canadian sales to the United States were essentially flat, edging down by 0.2 per cent. In fact, America's overall exports declined by 3.6 per cent while imports were down by 2.1 per cent. This was partly caused by Hurricane Sandy as the Port of New York and New Jersey was closed for the last few days in October.

In fact, the big surprise in October was that shipments to the European Union reversed six months of decline and shot up by 8.5 per cent. It is likely that the European Central Bank's announcement on September 6 that it would undertake unlimited bond purchases brought some relief to market pessimism that was smothering demand throughout the summer. The other bright spot was that exports to emerging markets rose by 11.6 per cent, a healthy gain from the fastest growing part of the global economy.

Looking ahead, we anticipate softness in exports to the US because of nervousness over the economic consequences of the fiscal cliff, the massive spending cuts and tax increases that go into effect on January 1, 2013. While a political solution seems likely, American businesses will hold off on investment until they have greater certainty, and this will partly offset strong consumer demand over the holiday season.

Secondly, we do not expect the recent record increases in agriculture exports to continue. They should level off in the coming months, so that shipments will remain at elevated levels while the monthly growth rates level off or even edge downward slightly. But overall, the export outlook for 2013 remains very positive.