TORONTO—A strong loonie and production geared to strained American households rather than emerging markets are being blamed for an eroding link between Canadian exports and U.S. economic growth in a report from CIBC World Markets.
While “quarterly U.S. exports have regained virtually all of the ground lost during the recession,” Canada’s real exports are still 15 per cent below their pre-recession peak, notes Avery Shenfeld, CIBC’s chief economist in the latest Global Position Strategies report.
Shenfeld cites the Bank of Canada’s U.S. Activity Index, a measure of American economic performance that normally moves in tandem with Canadian exports.
However, the two have diverged, indicating that Canadian exports are lagging behind their historical linkage to U.S. growth.
The contrasting recoveries reflect different export focuses north and south of the border. Countries such as China, Brazil and India buying U.S.-made machinery, aircraft, vehicles and other goods, and 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 US companies to meet this demand has also increased.
Regardless of the performance of Canadian resources, Canada’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 must better integrate themselves into US supply chains for goods destined for emerging markets.
With deficit reduction scheduled to commence in 2011, an improved performance for Canada’s exports and business investment spending would be a welcome addition to Canada’s growth mix. However, Shenfeld says shaping policy to see the economy on that path will be a “delicate exercise.”
“Look for the Bank of Canada, therefore, to take a very gradualist approach to rate hikes to hold back a further trade-denting surge in the loonie. That could see rates on hold through mid-2011, and no higher than two per cent before the [U.S. Federal Reserve] launches its own hikes,” he says.
The report raised CIBC’s 2011 U.S. forecast by 0.5 per cent to 2.4 per cent in light of the expected American government tax-cut deal, but also projected somewhat higher bond yields. It also raised his Canadian 2011 GDP forecast to 2.2 per cent from 1.9.