Last month, my fellow columnist Mike Moffatt published a list of the Canadian economic indicators that will influence the election campaign. Allow me to add a few.
Moffatt focused on the data that will make its way into campaign speeches and Twitter attacks. These figures will frame debates and allow voters to judge whether Stephen Harper’s economy is as bad as Tom Mulcair and Justin Trudeau say it is.
But Statistics Canada’s website will make for a poor crystal ball. If you want to know where Canada’s economy is headed, then you will need to keep an eye on a few U.S. indicators that correlate closely with Canadian exports. As we all know by now, exports are the economy’s only hope. Without a jump in international shipments, the country will continue to languish. Consumers are tapped out. (While the most recent export data from StatsCan showed 6.3% growth in June 2015, the export situation is more complex, as we’ll see.)
In April 2014, a few Bank of Canada economists published a short paper that should be the starting point for every conversation about the state of the economy. They studied 31 categories of non-energy exports, pairing each with a U.S. benchmark indicator. For example, they determined that Canadian exports of industrial machinery are tied to U.S. business investment. This is the Bank of Canada’s chart tracking the changes in both indicators since 2000:
As U.S. investment goes, so go the fortunes of Canadian makers of industrial machinery. Same for the men and women who make electronics, computers and other tech gear, and communications equipment. There are others, but these categories are important because they are part of a puzzle that the Bank of Canada is unable to solve.
Exports didn’t return to previous levels after the Great Recession and policy makers are unsure why. Some industries were destroyed in 2009 and may never come back due to heightened competition. But other categories, including the ones above, were expected to lead the recovery. Companies in these segments still were standing and history showed they did well when the value of the currency declined.
Yet a weak dollar so far has failed to spark a surge in non-energy exports.
Subdued business spending in the U.S. probably has something to do with it. American executives hoarded cash after the crisis. It is only over the last few quarters that they have resumed investing at levels forecasters would have expected:
Business investment data are found in the U.S. Commerce Department’s quarterly tally of gross domestic product. As a bonus, the GDP reports also contain data on personal consumption expenditure; the benchmark for Canadian exports of travel services, another segment the Bank of Canada expects to lead the export recovery. The government releases three estimates for each quarter. Updated GDP reports are scheduled for Aug. 27 and Sept. 25.
Canadian exports rose in June, the first increase in five months, StatsCan reported Wednesday. International shipments of consumer goods surged more than 17% to a record $6 billion. The gains mostly were from companies selling more stuff; changes in prices had little to do with the increase, the agency said.
This is the best report on the Canadian economy in quite some time. Nick Exarhos, an economist at CIBC World Markets, said the numbers offered a glimmer of hope that the worst could be over. Depending on your definition, the data suggest Canada may have avoided a recession.
Harper and his advisers will seize on the June trade data; the temptation will be too great. Yet the export puzzle remains unsolved. Here’s a rough chart:
The top line is monthly U.S. industrial production over two years ending in May, and the bottom line represents changes in Canadian exports of fabricated metals over the same period. The later is supposed to track the former. But of late, that hasn’t been true.
Fabricated metals is another of the industries that the Bank of Canada thought would lead the export recovery as shipments traditionally got a boost for a weak currency. Not this time. That raises questions about competitiveness that Harper could be called on to answer.
Or it could simply be a lagged effect from sluggish U.S. demand. The Federal Reserve releases industrial production data on Aug. 14, Sept. 15, and Oct. 16. Watch for them: they should accompany any assessment of Canada’s trade figures.
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