Canadian Export Forecast 2007
Slowdown Expected for Canada's Resource-based Global Trade
Nov 15, 2006
Canadian exports continue to suffer from lower commodity prices. Also, slower sales in the U.S. housing market has weakened consumer demand from Canada's largest trading partner.
U.S. economic growth is expected to slow from 3.3% in 2006 to 2.2% in 2007. Exports comprise about 40% of the Canadian economy, with more than 80% of exports shipped to the U.S. Earlier this year we published an article Canada's Trade Buddies which discusses America's powerful influence on Canadian trade.
Export Development Canada gave other reasons for the forecasted slowdown in Canadian exports, as listed below.
- Global oil prices will drop to US$50 in 2007
- Metal prices for Canadian exports like aluminum and nicket will also retreat
- Canada's currency will fall to around US$0.82 by the end of 2007.
Of course there are other risks. High interest rates, inflation and terrorism can provide shocks to further impede the growth of Canadian exports in 2007.
The imposition of corporate taxes on income trusts can negatively affect foreign trade and investment. Announced suddenly in early November 2006, abrupt changes to Canadian tax legislation for income trusts may well increase the "risk premium" that foreign investors will insist on before buying Canadian-based investments. Risk-adverse investors frown on governments that change tax policy rules despite having promised to not make such changes. Canada's management credibility has suffered in international circles as a result of the government's rather arrogant about-face. After all, if the Canadian government doesn't do what it says that it will do on an issue as sensitive as income trusts just what can an educated international audience be expected to believe?
Overall, Export Development Canada's prediction for Canadian exports in 2007 is more negative than that of the Bank of Canada. In October, the Bank of Canada said that it expected Canadian export growth will slow to a 0.7% gain in 2007.
And The Winners Are ...
Other countries are picking up the pace while the value of exports from Canada - the world's 8th largest economy - shrinks. Global economic growth is predicted to proceed at a healthy 4% in 2007, down from 4.8% in 2006 and 4.7% in 2005.
As a result, Canadian investors are increasingly looking to investment opportunities outside North America, based on recent growth trends in international trade. In particular, fund managers are upbeat on the prospects of investments in Brazil-Russia-India-China. Many analysts also believe that China will be the key driver for both international trade and investment in 2007.
From an international trade perspective, the question is whether Canadian politicians can negotiate appropriate trade relations with the Asian giant in particular. This shouldn't be an insurmountable challenge given China's hunger for exports from a resource-rich country like Canada.
And there are other Far East possibilities on the horizon.
In mid-November, Trade Minister David Emerson announced that Canada is interested in joining a proposed Pacific-wide trading zone. The zone is being discussed this week in Hanoi as officials prepare for the Asia-Pacific Economic Co-operation summit in Vietnam's capital.
Canada is keen to become part of the free-trade zone, comprised of up to 21 countries connected by the Pacific Ocean. The group of participating countries could extend the zone from the U.S. to to China, and from Australia to Chile. Such a free-trade zone would brighten prospects for Canadian exports considerably and well-beyond 2007.
Sources: Bloomberg News per Toronto Star article "EDC sees export drop" published November 7, 2006
