Export growth to the US market can co-exist with a high Canadian dollar, according to Stephen Poloz, a leading authority on export trends.
It is common belief that the rise in the Canadian dollar boosts the price of Canada’s exports, causing foreigners to buy less of them, and profitability quite naturally is eroded. But the problem with this analysis is its assumption that companies price their export sales in Canadian dollars, which is not that common, explains Poloz, senior vice president and chief economist with Export Development Canada. The majority of exporters price their wares in U.S. dollars, which means that a rise in the Canadian dollar has no impact on the foreign buyer at all its effects are mostly internal to the Canadian company.
"What this means is that exports can actually rise after the dollar rises (as we are now seeing), but each sale priced in U.S. dollars yields fewer Canadian dollars (less profit) than before," Poloz says.
The impact of the higher Canadian dollar on manufacturers has been widespread, but varied by sector. For example, the wood and paper sector saw a profit margin of 7% in 2001 and 5% in 2002, but it fell to 2% in the second quarter of 2003.
"The good news is that profit margins have begun to recover in most manufacturing sectors," Poloz says.
Margins in the wood and paper sector have recovered to 5.8% in 2004Q1, the latest data. Similarly, producers of alcoholic beverages and tobacco have seen margins rise from 20.6% to 25.8%. Margins bottomed in 2003Q3 for most others, with big recoveries in food and beverages (4.9% to 5.9%), printing (5.1% to 7.4%), primary metals (3.2% to 5.1%), electronics (minus 0.2% to plus 3.2%), motor vehicles (minus 1% to plus 2%) and motor vehicle parts (5.8% to 7.7%).
For some other sectors the stress continued into the fourth quarter, but margins have recently come back more or less into line with historical performance. Examples include petroleum and coal; chemicals, plastics and rubber; non-metallic minerals; and fabricated metals. There has also been a modest profit recovery in furniture, but margins remain low at 5%. And there has been no meaningful profit recovery in clothing, textiles and leather (3.4%) or electrical components and appliances (2.7%), where international competition is probably the toughest.
Profitability is being restored in various ways, Poloz points out. Investment in new equipment is booming imports of these items are up 20% over last year. But the most important effect has been through increased production.
"Companies can boost their efficiency and productivity simply by increasing production, especially if they do so without adding staff and employment in manufacturing has barely risen in the past year, which means that productivity has gone up significantly," Poloz said. . However, he also points out that capacity utilization data show that operating levels are still quite low in the textiles, clothing, leather, electrical appliances and furniture sectors where profit stresses are still the greatest.
"The bottom line? Profit margins are expanding again, almost across the board, largely as a result of the emerging export recovery. With the world economy expected to continue to grow into 2005, the profit recovery should continue, and hopefully broaden into those sectors still under stress," Poloz concludes.