Strengthen exports to developing economies, says BoC

Canada needs to export more to developing economies, which account for 80% of global growth, Bank of Canada senior deputy governor Tiff Macklem says.

“Our exporters are adapting, but it has been gut-wrenching,” he said at the Economic Club of Canada in Toronto today.

Exports account for a third of Canada’s income, and most go to the U.S. and Europe, which are still struggling with lower growth.

Read: Canada must look beyond China, U.S. for export growth: CIBC

Only 12% go to emerging markets. Other developed economies are already reaping the benefits of sending more goods to these economies, he adds.

If Canada were to send as many goods to emerging markets as the U.S. does, foreign demand would be $60 billion higher, he says.

A third of Canadian firms have already expanded into new markets like China and Brazil, while half of firms say they plan on getting into new countries in the next two years.

“There is much ground to make up,” says Macklem.

From 2008 to the depths of the recession in 2010, Canada lost 9,000 export firms. Exports are still $35 billion, or 6.5%, below pre-recession levels—and more than $130 billion below where they should be in a typical recovery.

Canada needs economic growth of at least 2.5% to return the economy to productivity, he says, but in the year leading up to June 2013 it averaged 1.4%.

The BoC expects consumer and government spending to make up 1.5 percentage points of the needed growth. Exports and business investment must drive the rest—but so far that’s not happening.

“Growth in demand has not kept pace with the expansion in production capacity, and economic slack has increased,” he says.

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Canada’s share in the U.S. market was already going down before the recession, he notes. Since 2000, Canada’s share of exports to America has gone from 4.5% to 2.5%. Our loss of global trade share is the second-largest in the G20.

The good news? Parts of the U.S. economy, especially housing sales, are picking up, and Canada’s building materials sector will benefit, he says.

The deputy governor is also optimistic about recoveries in Europe and Japan. China’s economic growth of 7.5% is also solid, he says, which will help keep commodity prices up—which helps Canada’s exports of natural resources.

The high dollar and weak productivity growth have hampered trade, he says. As companies have exported less, they have also invested less, leading to even lower productivity. He says this should change as the economy picks up.

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Another challenge is the types of goods Canada produces. Global demand is for machinery, equipment and consumer goods, which we don’t make a lot of. Energy, especially oil, now makes up almost 20% of the country’s exports, up from 11% in 2000.

Service exports also have a lot of potential, says Macklem. They already make up 15%, or $75 billion, of Canada’s exports, which is more than cars or machinery.

From financial services to new apps to multimedia, Canada is sending its services all over the world, not just to the U.S. and Europe, he says.

The Bank hopes exports and investment will pick up next year, but global uncertainty means this might not happen, Macklem acknowledged.

U.S. shutdown increases uncertainty

The U.S. government shutdown only adds to economic fears, says Macklem.

“The uncertainty that this ongoing brinksmanship is creating is not helpful,” he says.

But unless the government’s doors are closed for a long while, the shutdown won’t have major repercussions, he says.

There have been 17 shutdowns in the United States, he notes, though most lasted just a few days.

“The economic impact of short shutdowns is relatively small. If you look at the market response you can see today, that it’s muted. The market is hoping that this will be relatively short-lived,” he adds.

The 28-day shutdown that ran from 1995 to 1996 had “a measurable impact” on the economy, he says.

“More broadly, there’s enough uncertainty out there. Politicians should be working to reduce uncertainty, not contributing to it,” he says.