The Bank of Canada really, really wants you to look at this exports chart

Stephen Poloz and his colleagues have been waiting on signs of life in manufacturing exports, and now they think they see it. Does anyone else?

Bank of Canada Deputy Governor Carolyn Wilkins, left, with Governor Stephen Poloz

Bank of Canada Deputy Governor Carolyn Wilkins, left, with Governor Stephen Poloz. (Patrick Doyle/CP)

If you are one those haters skeptical of Canada’s export potential, the central bank drawn something it wants you to see: Chart 6 in its July 2016 Monetary Policy Report.

We have a great chart in the MPR that shows that non-commodity exports have recovered almost to their pre-recession peak, which puts the recent volatility into proper perspective,” Senior Deputy Governor Carolyn Wilkins said in her opening statement at the press conference the Bank of Canada held after it released the latest Monetary Policy Report (MPR) on July 13. “The trendline is better explained by that Chart 6 that Carolyn mentioned in her opening remarks, which shows that the export recovery is alive and well,” said Governor Stephen Poloz. When he was asked a second time to explain his faith in the export recovery, Poloz responded with sardonic disbelief. “You’ve seen Chart 6 in the MPR?” It was a rhetorical question.

In case you missed it, here’s Chart 6:

Chart showing Canada’s real exports from 2000 to 2018, projected)

“That’s a lot of growth in non-commodity exports in the last few years,” Poloz said at the press conference. Those few years happen to coincide with Poloz’s start date as governor. Three years ago, the former head of Export Development Canada was reluctant to make bold statements about the future. He had a tendency to respond to questions about when the Canadian economy might shake off the effects of the Great Recession with, “I don’t know.” Few economists had foreseen anything as traumatic as what happened in 2008 and 2009. Their models weren’t geared to absorb a financial meltdown in the United States and Europe. Poloz said the Bank of Canada would not only need to recalibrate its models, and also reconsider what it thought it knew about the way economies work.

That period of reflection appears to have emboldened Poloz’s conviction in the story he’s been telling from the start: that international sales of manufactured goods and services would lead a rotation away from the economy’s reliance on high commodity prices and consumption by heavily indebted households. It’s a good story, backed by history and sound economic theory. And it’s not just Poloz. Wilkins read the opening statement to emphasize that the Governing Council is a six-person operation, not a one man show. Canada’s biggest collection of professional economists is all-in on the non-commodity export story.

It’s a calculated bet, yet it’s still a gamble. Poloz and Wilkins last week were humming a lullaby with the sound of sirens in the background. Non-commodity exports and manufacturing sales crested at the start of the year and then tumbled through April, according to Statistics Canada’s most recent numbers. The noise could amount to nothing, but it sure is distracting.

Mark Chandler, head of Canadian fixed-income strategy at RBC Dominion Securities, sees red flags. He thinks the Bank of Canada’s prediction of a sharp rebound in economic growth over the second half of 2016 is too optimistic. There is a strong correlation between Canadian non-energy exports and U.S. industrial production—which is weak, according to the latest data. America also is suffering from the energy bust because it no longer is getting a push from its post-recession boom in shale oil and gas. “If the ‘tentacles’ of the energy sector stretch further than we may have thought—indirectly from the U.S. or in Ontario manufacturing shipments destined for Canada’s oil patch—it may be asking too much to have a narrowly-defined “non-energy” sector drag us back to above- potential growth,” Chandler said in a report last week.

The Bank of Canada isn’t oblivious to what has been going on in the background. The central bank’s previous quarterly forecast, from April, predicted exports would add 1.1 percentage points to economic growth in 2016, a strong number and roughly the same as last year. That estimate now is a meagre 0.3 percentage points, reflecting in part the fact that the northern Alberta wildfires temporarily stopped all production of oil this spring. But after weeks of deliberation, the Bank of Canada’s policy committee decided to trade and factory data from the start of the year weren’t sending a true signal. Poloz insisted the trend he anticipated in 2013—a steady increase in non-commodity exports buttressed by stronger demand in the U.S. and a weaker dollar—was now entrenched. Chart Six from the MPR, “tells us what our models told us all along, that this would happen,” Poloz said. The central bank has concluded that this year’s slump in exports is nothing more than the volatility that is inherent in attempts to measure the macroeconomy. “The weakness in the last three or four months, in that chart, is very hard to see,” Poloz said.

If the Bank of Canada is correct, Canadian non-commodity exports this year will surpass their 2007 peak and we will be able to stop calling it a recovery. Poloz characterized that as an impressive achievement given the “trauma” of the financial crisis. I’m not sure every economist would put a decade-long recovery in such positive terms. Canada’s weaknesses as a trading nation were exposed; first by the weak recovery in the U.S., and then by the collapse of commodity prices starting in 2014. As commodity prices slumped, South Korea surpassed Canada on the league table of the world’s biggest exporters. That’s symbolic of the fact that there are more countries competing for market share, even as global exports of good and services are growing at meagre rate of about 3%. Currently, there isn’t enough business to go around. Canada will continue to get a steady push for the U.S., the destination for more than 75% of its exports. But the action is in Asia, where Canada barely has made a dent: we send less than 1% of our exports to India, which currently is the world’s fastest growing major economy.

Poloz, Wilkins and the rest of the Bank of Canada have earned the benefit of the doubt. They saw the damage that would come from the collapse of oil prices long before Bay Street did. But the haters aren’t going anywhere; at least not until the data show the Bank of Canada—after more than three years of hoping—hasn’t been overcome by wishful thinking.