Trade confidence falters

Written by Stephen Poloz

Economists love numbers, and the cross they bear is that many of the numbers they receive are already months old when they are published. That is why it is useful to supplement real economic statistics with survey information — information from real people, making real decisions, right now.

EDC surveys about 1,000 Canadian exporting companies twice per year, in late spring and late fall. The survey asks companies about their outlook for the global and domestic economy, for exchange rates and for hiring, among other things. Several of the responses are combined into a single statistic, known as the Trade Confidence Index, or TCI.

The latest readings show that trade confidence has faltered, with the TCI dropping to 71.7 from 73.7 six months earlier. The main reason for the drop is a shift in perceptions of global economic conditions. Six months earlier, 18% of respondents said that global economic conditions would get worse, while 22% expected them to improve. This time, 24% expect conditions to worsen, and only 14% expect an improvement. In addition, there has been a noticeable increase in the percentage of companies expecting domestic economic conditions to deteriorate.

Overall, the situation remains a positive one, with 47% of companies still expecting export sales to increase, and only 11% expecting a decline. Nevertheless, exporters foresee slower global growth, especially in the U.S. and China, and are expecting continued geopolitical instability.

They are also expecting a stronger Canadian dollar — fully 34% of respondents expect an appreciation, up from only 21% six months earlier. When asked how they are responding to the strong dollar, fewer companies are now saying they will simply ride it out. Increasingly, they are saying that they will cut costs and root out inefficiencies in order to restore their profit margins. And, there has been a small decline in the number of companies contemplating hiring more staff.

Most export sectors showed weaker trade confidence, with the exception of the energy sector. Indeed, the decline in the TCI would have been much larger without the surge in energy sector confidence. At the same time, the largest drop in trade confidence was in Ontario. This sectoral and regional pattern is exactly what one would expect to see in an economy with a touch of Dutch disease — an inflating resource sector, a strong currency, and stressed manufacturing.

Indeed, it is surprising that the TCI has not eroded more in light of developments over the past 12 months. The TCI is a full point higher than it was a year ago, even though the Canadian dollar is up by nearly 6 cents during the same period. This points to the resilience of Canada’s export sector. But the survey also shows that there has been a steady increase in trade opportunities going on in recent years, despite the negative impact of the strong dollar.

The bottom line? Trade confidence faltered in late 2005, as we should expect given that the world economy is forecast to lose some momentum in 2006. That does not mean that 2006 will be a bad year for exporters, but it does suggest that it will be more stressful than 2005.

January 26, 2006

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

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