When international trade collapsed in 2009, the Canadian economy turned inward, and for a change, discovered a steady source of growth. That source is now tapped out, and economy-watchers have for some time turned their eyes back to trade. So far, the view has been uninspiring. Will Canadian trade carry growth forward, or is our hopeful gaze in for a big disappointment?
Over the last economic growth cycle, Canadian export growth outpaced the rest of the economy by a wide margin, averaging 5.6 per cent growth annually. Canada returned to this pace immediately following the 2008-09 crisis. However, for the past two years, growth dipped to a pace just over 1 per cent annually, putting trade aspirations at great risk. There is some consolation in concurrent global performance. World export growth averaged just 2.9 per cent during the same period. Even so, on a relative basis, Canada continued to lose ground. Is an about-face possible, or are we in trouble?
Canadian trade is indeed facing considerable headwinds. Weaker commodity prices are not helping. Net of the energy sector, year-to-year prices are down 10 per cent, and in spite of recent increases, energy prices have been pretty flat for the last two years. Volumes may be up, but margins are taking a hit. And those volumes could be higher, but transportation is increasingly an issue. Stalling of the Keystone pipeline construction has slowed US-bound oil flows. Increasingly, the industry is shipping by rail, which is creating constraints for other bulk shipments.
A looming problem is labour supply. Enhanced globalization of trade is a means of getting around this structural difficulty, but even so, one way or another the situation threatens to weigh on export data. Tighter global liquidity is a budding threat not just to Canadian trade but to all trading economies. New regulations and the wind-up of extraordinary monetary measures suggest that finding money, particularly for emerging market trade, could be more tricky in the near future. Add to these issues soft Canadian business investment, crisis-fueled global protectionism, and rising political unrest in a number of markets, and the headwinds are looking daunting.
However, there is a decent list of positive factors, some of which suggest an imminent dissipation of key headwinds. First and foremost is world growth, led by US economic revival. Canada is already seeing very positive effects in exports that feed off key US leading indicators, suggesting that other exports will soon join the party. The weaker loonie, now 7 per cent lower than the 2013 average, suggests a boost of about 1 per cent to GDP, if sustained.
At the same time, diversification of trade to fast-growing emerging markets seems set to continue. Also, weakening of our domestic sector may push exporters who over the past few years sought refuge on the home front to re-engage with the external economy again. In a liquidity-constrained global market, the robust Canadian financial system may prove to be a great support to export activity. Add to that the trade and investment deals that Canada has inked and is currently working on, and the prospects for dynamic near-term export activity are further enhanced.
Weak performance to date is eliciting fears that Canadian trade may be getting left behind this time around. However, business is understandably skittish after five years of global mayhem, and it still remains to be seen whether investment will step up to the plate again. The potential is strong, and companies have money. Moreover, there are nascent signs in the auto sector that significant investments could be on the way. Add that to the bevy of potential resource projects, and there is enough to make a case for a medium-term, export-oriented investment boom. Time will tell.
The bottom line? When trade decides to grow again, it usually does so with a great surprising burst. It's too early to write off Canadian trade, and given budding conditions, it's best to keep an eye on this dynamic sector.