EDC Economics has just released its latest Global Export Forecast, and the story is a discouraging one for exporters. After a flat overall performance in 2006, exporters appear to be headed for two more years of little or no growth in total export sales.
There have been more flat years than good ones recently. Canada saw a veritable export boom during the late 1990s and 2000. Then, a global and U.S. slowdown in 2001 caused exports to decline outright. This weakness extended into 2002 and then again into 2003 even as the global recovery unfolded, because the Canadian dollar rose strongly. In 2004 and 2005, export growth resumed as the world economy boomed and resource prices rose. But the dollar ratcheted even higher as global growth levelled off in 2006 at 5.1%, again causing exports to turn flat.
We now foresee a further slowdown in global economic growth in 2007, to 4.5%, followed by growth of 4.6% in 2008. Behind this slowdown is a significant moderation in the U.S. economy, to 2.1% growth in 2007. A modest recovery looks to be in prospect for the U.S. in 2008, and this will mark the beginning of a gradual upturn in Canadas export growth, too.
Commodity price fluctuations play a key role in this forecast. Slower world economic growth will mean softer prices for base metals and oil, which can cause Canadas export growth to falter even if the underlying shipments remain the same or increase. By way of illustration, we are expecting oil prices to average $55 in 2007, and $50 in 2008. For this reason, it is useful to look at export growth in price-adjusted, or volume, terms. On this basis, our export volume forecast looks like a classic business cycle a big peak in 2004, very little growth in 2005, an outright decline in 2006, a return to growth of 1% in 2007 and forecast growth of 2% in 2008.
Another key element of this forecast is the Canadian dollar. Its petrocurrency status, combined with our forecast of softer oil prices, means that the dollar should decline. We are forecasting that the dollar will ease to U.S. 83-84 cents by end-2007 and 82-83 cents by end-2008, as oil prices are expected to settle around $50. This means that Canadas economy will retain its two-track nature for the next two years, with the energy sector outperforming and manufacturing struggling.
The outlook is for continued solid growth in emerging markets, and this shows up in the export forecast. After 18% growth in 2006, exports to emerging markets are forecast to rise by 9% in 2007 and 4% in 2008. Exports to major markets, in contrast, are forecast to be flat for the next two years, dominating the outlook. Export strength will be most evident in agri-food, fertilizers, telecom and other machinery and equipment. Weakness is forecast to persist in 2007 for forestry, consumer goods and motor vehicles and parts. A return to positive, yet very moderate, growth is in prospect for forestry and motor vehicles in 2008, as the U.S. economy picks up.
The bottom line? The world economy is in good shape, and is forecast to remain so. But the combination of slower global economic growth, persistently high oil prices and a strong Canadian dollar will continue to weigh on Canadian exporters in 2007-08.
Stephen Poloz is Senior Vice-President, Corporate Affairs and Chief Economist, Export Development Canada. His column on trade-related issues appears weekly on www.ctl.ca. He will also be speaking at the upcoming SCL annual conference.