A low Canadian dollar and surging U.S. economy will drive growth in Ontario’s key export sectors for the rest of this year and into 2015, according to the latest forecast by Export Development Canada. Shipments of industrial machinery, chemicals and plastics, in particular, are set to rise as demand in the world’s biggest economy — finally — gets back on solid footing, a prediction that has been at least two years in coming.
Canadian Exports: Fall 2014 Forecast
“The prime difference this time is that there actually is sustained, real recovery-style growth happening and it’s starting with our Number One customer south of the border,” said Peter Hall, chief economist with Export Development Canada, known as EDC.
EDC’s new outlook, released Wednesday, predicts that exports from Canada’s largest province, which reached $164 billion in 2013, will be up 7 per cent overall this year, and rise 5 per cent in 2015.
“Tight industrial capacity stateside is igniting U.S. business investment well ahead of the normal timetable,” said EDC chief economist Peter Hall. he said. “Rising U.S. industrial output will also boost Ontario’s chemicals and plastics industry to 12 per cent and 5 per cent export growth in 2014 and 2015, respectively.”
The EDC says the auto sector made up 35 per cent of the province’s exports in last year and should grow by 8 per cent this year and by 3 per cent in 2015.
Credit for much of the export sector’s optimism goes to the weaker Canadian dollar, which has made Canada’s exports more competitive in the U.S. market. Increasing U.S. auto sales should add momentum to the domestic sector.
That optimism can also be seen in Canada’s labour market, where renewed job growth in Ontario’s manufacturing sector has begun to whittle away at the province’s chronically high unemployment rate.
The latest figures from the U.S. government show that the country’s economy expanded by a vigorous 3.5 per cent annual rate in the third quarter.
According to EDC, real merchandise exports are on an eight-month surge, and are currently up 12 per cent year-on-year. And in spite of its weaknesses, the Eurozone is importing from Canada at a respectable rate as well. Export growth is forecast to reach 10 per cent this year and 6 per cent in 2015. Gains span a wide variety of industries, and extend across almost every province. Momentum is strong, and it is expected to be a boost to trade-related business investment. Capacity has tightened up in recent months, and Canadian firms will soon be faced with significant expansion decisions. In spite of domestic weakening, Canada’s GDP growth is forecast to accelerate to 2.8 per cent next year.
As economic indicators go, the crisis was pretty tough for U.S. business investment, says EDC. After adjusting for inflation, total private investment fell by 20 per cent in just 18 months, and from there it took 48 months just to climb back to pre-crisis levels. Trend investment growth would have had it well above that level by now; as a share of GDP, investment is still 500 basis points below where it ought to be.
There’s additional evidence in construction spending, points out EDC. In the energy sector, construction put-in-place is currently up 29 per cent year-over-year, an impressive increase. For all the naysaying that it takes, US manufacturing is also active. The same indicator for this sector is up 20 per cent over 2013 levels. What is striking about these industries is their rapid response to conditions. Typically, it takes a couple of years for needed construction to get put in place. This time around, capacity is likely turning this kind of investment on much more quickly. If so, suppliers could be facing a great dilemma.
Looking more closely at individual countries, exports of Canadian goods to the U.S. are projected to grow by just over 12 per cent in 2014 and 6 per cent in 2015, EDC found. The U.S. accounts for over 75 per cent of Canadian merchandise exports, 41 per cent of the stock of Canadian direct investment abroad, and 50 per cent of all sales made by Canadian foreign affiliates.
The outlook for the US economy is very positive, says EDC. American business is performing well: corporate profits are near an all-time high of $2.1 trillion, while businesses are estimated to hold cash and equivalents in excess of US$6 trillion. Businesses have been reluctant to invest because of pessimism about conditions, but consumer confidence is rising. With household deleveraging largely complete, the ratio of debt service payments to personal disposable income is at its lowest level on record since 1980 and retail sales are strengthening. The U.S. housing market is improving with prices and home sales showing sustained growth. Due to pent-up demand, EDC expects that home starts will rise approximately 11% in 2014 and 28% in 2015, while those new homes will require all sorts of spending on durable goods. As confidence builds, this recovery among consumers will give rise to increased business investment to meet this demand.
As for the forestry sector, average annual growth in forestry exports will come in at 13 per cent this year and 8 per cent in 2015. Nearly all of the growth is expected to come from lumber as U.S. housing starts rise. However, capacity constraints at existing mills allow little room for expansion in this sector.