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Machinery and equipment exports exempt from EDC’s bad news

Ottawa, ON -- The Export Development Corporation's latest survey of exporting companies has shown another dip in tr...


Ottawa, ON — The Export Development Corporation’s latest survey of exporting companies has shown another dip in trade confidence, according the the organization’s weekly newsletter issued July 9, 2003. The good news is that the stresses preoccupying exporters are likely to ease over the next 6-12 months.

EDC’s Trade Confidence Index has fallen to 73.3 from 76.1 six months ago and 80.3 last year, says Stephen S. Poloz, vice-president and chief economist. Given the perfect storm that has hit exporters slower growth; SARS; mad cow disease; and the rapid rise in the Canadian dollar an even larger drop in the index might have been expected, he said. The declines are broad-based, affecting all sectors except machinery and equipment, which held steady. Nevertheless, confidence is still above the lows set during the global slowdown of 2001.

The dominant concern among the over 1,000 exporters surveyed is the recent rise in the Canadian dollar, which is behind the pessimism on foreign sales growth, said Poloz. Hiring intentions have also dropped only 30% of exporters expect to increase hiring, instead of 43% in the last survey, although the low percentage expecting to reduce hiring suggests a plateau, not a contraction.

Events in the past three months suggest that Canada’s exports will not grow as much this year as previously forecast, Poloz noted. SARS is now expected to reduce Canada’s tourism receipts by over $1 billion this year, and the mad cow crisis could take over $2 billion out of agri-food exports, depending on when the bans on Canadian beef imports are lifted. On top of that, the stronger Canadian dollar is cutting into headline sales growth by reducing the prices received for many exports.

EDC’s March forecast of 5% export growth for this year has been trimmed to 2% as a result. Excluding energy exports, which are booming, foreign sales of goods are now expected to decline by 1% this year.

Even this uninspiring forecast assumes that exports regain traction in the second half of this year, Poloz says. “Fortunately, world economic growth now appears to be picking up, especially in the U.S., but also in Europe, and even in Japan.”

“Leading economic indicators are up, purchasing managers’ surveys show strength, shipments of cardboard containers are rising, and stock markets and bond yields are up,” he said. “Meanwhile, the U.S. dollar is stabilizing, and gold prices are declining all signs that the worst is probably behind us in terms of global economic health. The pause is over.”

As for adjusting to the stronger Canadian dollar, pessimists contend that exports will weaken significantly through the remainder of this year. This assumes that Canadian exporters will immediately attempt to extract large price increases from their customers and lose the sales in the process, Poloz says. “In contrast, our belief is that exporters will accept lower or even negative profit margins for now to retain the business, and then ride out the storm, rebuilding margins through strategic investments and cost cutting over the next few months.”

Furthermore, he says, relief is on its way: stronger U.S. growth in the second half of the year will boost export sales and commodity prices, and pull the Canadian dollar back down toward its fundamental value of around 70-72 cents.

EDC’s bottom line? “Exporters are understandably concerned about the future,” contents Poloz. “But the perfect storm is subsiding we should end 2003 on much firmer ground, and see a solid growth year in 2004.”