I’m sure you heard them too: the murmurs that an extended run of poor-to-terrible economic data could force the Bank of Canada to cut interest rates. They started August 5 after Statistics Canada reported that employment plunged in July and that the trade deficit widened to a record $3.8 billion in June.
These numbers unnerved members of commentariat. “If exports are going to lead this recovery, it might be the best prescription to kick open the stubbornly sticky door to the critical U.S. market,” David Parkison wrote in a column for Globe and Mail subscribers. Parkinson’s battering ram of choice would be an interest-rate cut, which he reckons would weaken the currency, thus making our stuff cheaper than that being hawked by competitors from Mexico, South Korea, Germany and elsewhere. “Without something to open that door, Canada may soon justify a rate cut anyway,” Parkinson concluded.
If only it were that simple. Canada’s currency has averaged about 75 cents against the U.S. dollar this year, about a dime less than at the start of 2015. That discount should be enough to get Canadian exporters in the game, provided America is buying. And there’s the rub: The U.S. unemployment rate is a mere 4.9%, but wages are increasing at an annual rate of about 2.6%, less than the rates of around 3% that were characteristic of the pre-recession years. Regardless, Canada’s trade with the U.S. is geared to business investment more so than household consumption—and American companies are hoarding their profits.
That’s partly because the world is a pretty bleak place outside their borders. And every time an international central bank introduces a new round of monetary stimulus, the U.S. dollar spikes, striking a blow to America’s own exporters and handing the Federal Reserve another reason to avoid raising interest rates. “It is a U.S. economy that is probably pretty close to its pattern of the last seven years, but the risks to us from the global economy are to the downside,” Jerome Powell, a member of the Fed’s Washington-based Board of Governors, told the Financial Times in an interview published August 7. Powell added that it would be difficult for the Fed to raise interest rates, “in a world where everyone else is cutting and demand is weak around the world.” In other words, there is no guarantee another interest-rate cut would provide Canada’s exporters a lift, because other central banks would pivot to neutralize any advantage.
It’s become a reflex action to turn to the central banks at the first sign of trouble. Politicians in the world’s biggest economies have done little of note when it comes to economic policy for years, while too many executives are more interested in buying back shares than investing in their enterprises. But when it comes to trade, the Bank of Canada has done about all it reasonably can. The weaker currency likely is net positive for exporters, but the exchange rate is making it more expensive to import state-of-the-art equipment.
The fatal flaw of Canada’s economy is that it is underexposed to the world’s fastest-growing markets. Tiff Macklem, the former senior deputy governor at the Bank of Canada, observed in a speech in October 2013 that if Canada had the same exposure to emerging markets as the U.S. did, international demand for exports would have been $60 billion higher. In 2000, Canada was responsible for 4.5% of world exports; the country’s share in 2015 was 2.5%, according to the World Trade Organization. With the possible exception of Mexico, Canada isn’t doing significantly more business with the bigger emerging markets than it was when Macklem spoke almost three years ago.
There’s not much the Bank of Canada can do to boost trade with India. In fact, the Canadian dollar has strengthened against the rupee this year, as it has against the Mexican peso and (until very recently) the South Korean won. If Canada wants to gain market share in these places, its executives and trade diplomats will have to do it without the crutch of a depreciated currency. Trade Minister Chrystia Freeland in June signed a “strategic partnership” with the Pacific Alliance trade bloc of Mexico, Chile, Peru and Colombia—a baby step that should lead to more opportunities for Canadians in the most stable patch of Latin America. At the same time, Freeland appears to be working hardest at completing Canada’s trade agreement with the European Union. That’s understandable, but nothing that will pivot Canada’s trade to Asia, the home of the world’s fastest-growing economies.
Not that it is up to Prime Minister Justin Trudeau and his cabinet to make Canada a “trading nation” with more than a couple of significant trade partners. Executives, shareholders and entrepreneurs have to make the leap. They should do so with the knowledge that the central bank has laid out a cushion of ultra-low interest rates. If that’s not enough, then it is Freeland who will have to pick up the pace. The Bank of Canada has done all it reasonably can.
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