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Canada’s real exports remain 15% below their pre-recession peak, struggling under the weight of a strong loonie and a production market that is geared more toward strained U.S. households than emerging markets, according to a new report from CIBC World Markets.
Canada’s export lag comes as “quarterly U.S. exports have regained virtually all of the ground lost during the recession,” notes Avery Shenfeld, CIBC chief economist in the latest Global Position Strategies report.
The contrasting recoveries reflect different export focuses north and south of the border, the report notes. Countries like China, Brazil and India “are lapping up U.S.-made machinery, aircraft, vehicles and other goods. As a result, [U.S.] exports to emerging markets have been consistently outpacing American shipments to industrialized trading partners like Canada, Europe and Japan. The capital spending by corporate America to meet those needs has also been ramping up sharply.”
While prices for Canadian resources are getting a lift from overseas demand, the country’s “role in emerging markets remains trivial relative to its U.S.-bound exports,” says Shenfeld. With continued weakness in American housing starts and auto sales—traditional drivers for Canadian exports to the U.S.—Shenfeld believes Canadian “exporters will have to do a better job of integrating themselves into American supply chains for goods destined for the faster growing demand in emerging markets.”
Canada’s recovery has thus far been driven by debt-financed housing, consumption and government spending. Given that deficit reduction is scheduled to commence in 2011, turning government spending into a net drag, an improved performance for Canada’s exports and business investment spending would be a welcome addition to the country’s growth mix, notes Shenfeld. However, “shaping policy to see the economy on that path will be a delicate exercise.”
While higher interest rates might be used to steer households away from excessive debt accumulation, Shenfield warns that taking rates well above those in the U.S. could send the Canadian dollar to new heights. With the exchange rate already “weighing against export’s role as a growth driver,” the Bank of Canada has to tread carefully to avoid putting an even greater hurdle in front of companies trying to compete in the U.S. market.
“Look for the Bank of Canada, therefore, to take a very gradualist approach to rate hikes, one timed to hold back a further trade-denting surge in the loonie. That could see rates on hold through mid-2011, and no higher than 2% before the [U.S. Federal Reserve] launches its own hikes.”
In the report, Shenfeld raised his 2011 U.S. forecast by 0.5% to 2.4% in light of the expected American government tax-cut deal, but also projected somewhat higher bond yields. He also raised his Canadian 2011 GDP forecast to 2.2% from 1.9% to capture the updraft from reduced U.S. fiscal drag.
The complete CIBC World Markets report is available here.