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Canada no longer knows how to sell anything to the world except oil and gas.
Okay, that’s an exaggeration, but if things keep going the way they are, it won’t be for long.
StatsCan’s latest numbers on Canada’s trade balance, released Thursday, look positive on the face of it: Exports and imports both grew, and Canada’s trade deficit with the world shrank by more than half, to $435 million.
But dig a little deeper into the data, and what you see is a story of two different export sectors. As BMO chief economist Doug Porter put it in a client note Friday morning, “there is energy (doing just fine) and there is everything else (doing anything but fine).”
While energy exports have seen a $63.6-billion surplus for the past 12 months, everything else has seen a $72.9-billion deficit.
Check out this chart of Canada’s trade balance for energy (blue) and everything else (red).
The gap between energy and everything else is translating into a regional divide in Canada — between the booming, oil-reliant West and the plodding economy of the rest of the country.
“The rapid pace of oilsands development is creating economic risks and regional disparities that need to be addressed,” the left-leaning Pembina Institute said in a report released this week.
The report said the “overwhelming majority” of economic benefits from the oilsands boom “are limited to Alberta. Other provinces will benefit less: even the United States would gain more employment opportunities from the oilsands than the rest of Canada if oilsands development goes ahead as projected.”
Bringing more jobs to the oilsands wouldn’t work as a solution; the oil, gas and mining sector employs 225,000 people, compared to 1.5 million jobs in manufacturing. Booming oil exports simply can’t replace stagnating factory exports. (Incidentally, jobs in oil, gas and mining actually fell by about 0.2 per cent over the past year.)
In a report this week, BMO’s Porter called Canada’s stagnating export sector the country’s biggest economic challenge.
“Since 2000, Canadian exports have suffered through their own version of the lost decade, with volumes essentially unchanged over that spell,” Porter wrote.
“To put that in perspective, the next slowest 13-year stretch for real exports over the past half-century was 42 per cent growth from 1970-83.”
Porter notes that manufacturing employment in Canada — which is heavily dependent on exports — has shrunk by 20 per cent since 2000, even as jobs in the rest of the economy grew by a bit more than 20 per cent.
Nowhere is this more clear than in the auto industry, once one of the major drivers of central Canada’s economy. Vehicle production is down nine per cent this year — and that’s despite a global boom in auto sales
And the worst may be yet to come. Analyst Joe McCabe recently told an auto industry conference he expects car manufacturing to shrink another 28 per cent over the next decade.
So what’s to blame for this? Porter notes that the last 13 years of stagnation coincide with “the long upward march of the loonie,” which bottomed out around 62 cents U.S. in 2002 and steadily climbed to parity by 2008. The rising dollar has made Canadian exports more expensive on the global market.
That “played a key role in undercutting the manufacturing sector in particular,” Porter writes, though he’s cautious not to blame the rising loonie on oil exports — the old “Dutch Disease” debate.
But the Pembina Institute has little doubt Dutch Disease is Canada’s diagnosis.
“Recent analysis suggests that surging commodity prices explain as much as 40 to 75 per cent of the dollar’s rise,” the Pembina Institute said, referring to the loonie’s reputation as a “petro-currency.”
The report urges the government to launch a federal committee to look at the problem and recommend solutions “to ensure a robust, diverse economy that supports economic growth and competitiveness across Canada.”
The Bank of Canada has held its key interest rate at one per cent and cut its outlook for economic growth to 1.6 per cent this year, 2.3 per cent in 2014 and 2.6 per cent in 2015, a sizable downgrade from its July outlook.
In its monetary policy report released today by governor Stephen Poloz, the bank says it sees the economy returning to full capacity by the end of 2015.
The statement also removes the bank’s warning that a rate hike is inevitable, a “major turn in guidance,” according to Andrew Pyle, senior wealth adviser and portfolio manager at Scotia McLeod.
“There is clearly not enough confidence in the U.S. or global economy to push export growth and the Bank is also more concerned about a potential correction in the housing sector because of the continued ramp-up in prices,” Pyle said in a note to investors.
The Bank of Canada says softer-than-expected U.S. growth pushed the full recovery of the economy later, but that it expects “a better balance between domestic and foreign demand will be achieved over time and that economic growth will become more self-sustaining”.
In its July report, the bank had predicted the Canadian economy would grow 1.8 per cent this year, followed by 2.7 per cent in 2014 and 2015, returning to full capacity in mid-2015.
The report sent the Canadian dollar plummeting, down 0.93 cents against the U.S. dollar to to 96.27 cents US in mid-morning trading.
That won’t be the end, according to Pyle, who says he sees the Canadian dollar falling to 92 cents US within a month, and that he believes Poloz is attempting to push the dollar down to boost exports.
The lower economic outlook and stubbornly low inflation mean the Bank of Canada is likely to hold interest rates for at least another two years, Pyle says.
TD Bank says it now believes rates will stay unchanged until 2015, according to commentary by economist Diana Petramala.
“Interest rate hikes will be gradual and dependent on economic performance and financial conditions going forward, with the bank keeping a close eye on the evolution of domestic risks,” Petramala says.
- Bank of Canada rate unchanged (globalnews.ca)
- BoC downgrades economy for next three years, keeps interest rates unchanged (canadianbusiness.com)
- The Bank of Canada is keeping its trendsetting overnight interest rate at one per cent. (newscanadanetwork.wordpress.com)
- Bank of Canada Drops Bias to Lift 1% Policy Rate (bloomberg.com)
As almost everyone knows by now, Canada has some interesting challenges looming when it comes to transporting increasing oil production to markets both inside and outside of Canada. What many Canadians might not realize is how important oil exports are to Canada’s economy. Canada has the world’s third largest proven oil reserves, is the fifth largest exporter of crude oil, and is the fifth largest producer of crude oil in the world. And that’s only expected to grow: According to the Canadian Association of Petroleum Producers, production of oil from Alberta’s oil sands is expected to more than double by 2030, rising from the 2012 level of 3.2 million barrels of oil per day to 6.7 million barrels per day.
What would that mean for the Canadian economy? In 2011, CERI, the Canadian Energy Research Institute projects that investments and revenues from new oil sands projects would be approximately $2-billion over the period from 2010 to 2035, with a total GDP impact of $2.1-billion in Canada. Employment, both direct and indirect stemming from new oil sands investments is projected to grow from 75,000 jobs in 2010 to over 900,000 jobs by 2035. And CERI’s estimate is somewhat more conservative than CAPP’s, estimating oil production at only 5.4 million barrels per day by 2035….
- Pipeline – Oil and Economy or Environmental Disaster? (netnewsledger.com)
- Oil sands facts that will blow your mind (mining.com)
- Tar Secret #2: What percentage of Canada’s GDP comes from the tar sands? (vancouverobserver.com)
- Scraping the barrel (nzherald.co.nz)
- Bank of Canada’s key interest rate not expected to change (cbc.ca)
- Poloz’s rosy outlook best taken with grain of salt (theglobeandmail.com)
- Dark horse no more: Who is Canada’s central bank governor anyway? (theglobeandmail.com)
- Bank of Canada sees more confidence in Canadian economy, foreign demand: Poloz (macleans.ca)
- Stephen Poloz: Canada close to ‘tipping point’ for business investment (business.financialpost.com)
- Canada’s economy slows as G7 peers gear up (business.financialpost.com)
- The loonie is in for a rough September (business.financialpost.com)
- Over-heated housing market a drag on down Canada’s economic standing, report says (vancouversun.com)
- Finance minister cautious on Canada’s economy (cbc.ca)
- Third Annual BMO Food Survey: Canadians Coast to Coast Making the Effort to Buy Local (sys-con.com)
- Solving energy market access would create 20,000 new jobs: report (calgaryherald.com)
- Harper promotes oil sands and Keystone XL in New York (vancouverobserver.com)
- Smoke and mirrors cloak carbon emissions bottom line (o.canada.com)
- More from Sustainalytics (macleans.ca)
- Crude Landlocked as Canadians Join U.S. to Halt Pipelines (bloomberg.com)
- Signs of a Canadian housing downturn are everywhere (business.financialpost.com)
- No crash in store for Canadian housing market: Scotiabank (business.financialpost.com)
- UPDATE 3-Bank of Canada cuts growth forecast, warns again of higher rates (xe.com)
- Why is the Bank of Canada so fixated on a 1% rate? (business.financialpost.com)
- Canadian housing and economic trends: The good, the bad, and the ugly | The Economic Analyst (theaffluentboomer.wordpress.com)
- Signs point to Canadian housing ‘soft landing,’ not crash (cbc.ca)
- Canada’s rising oil production at risk if no new pipelines (dawn.com)
- HIGHLIGHTS-Bank of Canada’s Carney speaks in Ottawa (xe.com)
- UPDATE 3-Bank of Canada cuts growth forecast, warns again of higher rates (xe.com)
- Bank of Canada stands pat as outlook darkens (cbc.ca)
- UPDATE 2-Bank of Canada cuts growth forecast, warns again of higher rates (uk.reuters.com)
- No rate change from the Bank of Canada. What does this mean for you? (leslieblais.wordpress.com)