Energy exports to fuel Canadian growth

Global economic activity is expected to strengthen over the coming year, and increased momentum in the U.S. and China should lift Canada’s exports in the short run, notes a report by HSBC. In the longer term, Canada’s ability to access fast-growing emerging markets is dependent on an increase in energy infrastructure capacity.

World energy demand and prices are expected to rise in 2015, and Canada’s production continues to outpace domestic demand creating ample potential for Canada to ramp up its energy exports beyond its current key U.S. market.

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“Oil will contribute nearly 50% to the increase in exports over the next two years,” says Linda Seymour, executive vice president and head of commercial banking, HSBC Bank Canada. “However in 2017 to 2020, its share is forecast to drop below 20%. Canadian firms need to expand and diversify their energy export strategies if Canada is to remain a key player in the global energy market.”

She adds, “Rail will be the key driver until 2020 after which research shows that planned pipeline projects have the possibility to address this challenge. If Canada can build the necessary infrastructure, it will be well placed to become a global exporter of oil, rather than one overwhelmingly focused on the U.S.”

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The U.S. currently receives 97% of Canada’s energy exports. Oil exports to the U.S. are expected to grow by 7.4% in 2014 to 2016, moderating to just above 5% further out. In contrast, petroleum exports to China will grow by 53.7%. As a result, China’s 0.2% share of Canada’s fuel exports in 2013 is forecast to rise to 0.9% in 2020 and to 2.5% in 2040. Europe will also see stronger growth of energy imports from Canada.

Short term outlook

Canada’s GDP growth is forecast to accelerate modestly from 2.0% to 2.1% in 2014, with the rebalancing taking longer to unfold than previously anticipated. Growth in consumer spending is forecast to decelerate from 2.4% to 2.2% in 2014 as households continue to deleverage. A rebound in investment in the second half won’t be enough to counteract the 3.9% annualized decline in Q1, implying little growth contribution from investment this year.

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The fastest-growing markets for Canadian exports in 2014 to 2016 are expected to be Mexico, Korea, and China, and the fastest growing source markets for Canada’s imports over the same period will be Mexico, Turkey, and the U.K.

The U.S. remains strategically important for Canada’s trade position, identified as the primary trade partner by 76% of survey respondents. Asia, and particularly China, are next in importance, with 18% and 12%, respectively.

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Additional findings include:

• one-quarter of Canadian firms say Asia will be the best opportunity for business growth over the next six months, compared to 42% of respondents globally;
• 60% cite fluctuating exchange rate conditions as the top barrier to export and import business, and costs of essential services such as shipping, logistics and storage were a primary barrier for 44% of respondents; and
• by 2017, China will take the lead as the fastest-growing market for Canadian exports; by 2017, imports from India, Turkey, and China will show the strongest growth.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.