Is energy fuelling Canada's export engine?

Written by Stephen Poloz

How is Canada doing on the trade front? The common perception is that exporters are struggling, mainly due to the strong Canadian dollar, and that the lone exception is the energy sector.

Now that the numbers are in for all of 2005, we can look at the year’s performance objectively. And the numbers suggest that there is a fair bit of good news in Canada’s export sector.

Consider that merchandise exports rose by 5.7% in 2005. This is less than might have been hoped — given that the global economy grew at a pace in excess of 4%, something closer to 8% export growth would have been a reasonable forecast. But the Canadian dollar is now about 30% higher than its low point in 2002, and this was bound to have a negative impact in some sectors. What is surprising, perhaps, is how little impact the appreciation has had on export growth.

Nor does the figure of 5.7% tell the whole tale. Overall, Canada’s exports have momentum heading into 2006. December 2005 export levels were nearly 16% higher than December 2004. Even so, many would simply note that export growth has been mostly about energy, because of high oil and gas prices. Indeed, something like 80% of the year’s growth came from this source. But looking beneath this, and correcting for price fluctuations, reveals an entirely different story.

After adjusting for price increases, it turns out that exporters saw growth of 3.6% in 2005, a respectable number. And, virtually none of this growth was due to increased shipments of energy. In fact, 80% of the growth in export shipments came from machinery and equipment and the auto sector. This is very surprising in light of the dollar’s big increase.

In fact, export volume weakness was concentrated in wheat, alcoholic beverages, pulp and paper, organic chemicals, fertilizers and certain consumer goods. In contrast, there was considerable growth in export volumes of metals and ores (7.4%), industrial machinery (5.1%), aircraft and parts (9.6%), ground transportation equipment (8.0%), televisions and telecommunications equipment (16.9%), office equipment (16.5%) and autos and parts (3.7%).

This resilience in some manufacturing sectors suggests that many are finding ways to cope with a strong currency, not to mention high prices for metals and various forms of energy. One piece of evidence is that companies are investing heavily, taking advantage of the strong dollar to import all sorts of new equipment at low prices. After adjusting for price effects, the trade figures show that machinery and equipment imports rose by 15.2% in 2005, a number that rivals that posted during the run-up to Y2K. There are big numbers for mining and drilling equipment (36.7%), of course, but also for office machinery (24.0%) and other industrial equipment (11.5%). We cannot expect all sectors to respond at the same pace, but these numbers augur well for the future.

The bottom line? Clearly, there is more to Canada’s recent export performance than just energy shipments. The resilience and flexibility being demonstrated by other sectors in response to the strong Canadian dollar is very encouraging. Expect these trends to continue in 2006.

February 16, 2006

The views expressed here are those of the author, and not necessarily of Export Development Canada.

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