Exports continue to give cold shoulder to Bank of Canada’s Poloz

November 13, 2015

Ever since Bank of Canada Governor Stephen Poloz took office, he has preached the merits of a weaker currency for Canadian exports. But the roughly 30 percent fall in the dollar since then has failed to coax an export-based revival in Canada.

The latest trade data were yet another disappointment.

Although the trade gap narrowed, export growth remained lackluster during the third quarter.

That’s when an export-led recovery should have begun, in theory at least, courtesy of an improving U.S. economy and a consistently weakening Canadian dollar.

Early in the year, foreign exchange strategists had said the Canadian dollar at around C$1.20 per U.S. dollar was weak enough to stimulate the economy.

Even with the exchange rate now weaker than C$1.33 — its weakest since the 2008 global financial crisis and well beyond the most pessimistic forecasters’ views at the start of the year — it has failed to lift exports materially.

Canada exports and growth

Last year’s oil price shock was a major reason for the currency’s sharp retreat, prompting the BoC to shift focus to non-energy exports to revive the economy by the second half of 2015.

According to CIBC, a near 20 percent depreciation in the currency should boost exports by roughly 12 percent.

The Canadian dollar has lost almost a quarter of its value since the oil price rout began in June 2014.

But since exchange rates alone do not drive exports, the export rebound has not happened.

Take Britain, for example, where the Bank of England has been trying to rebalance the economy toward exports from debt-fueled household spending for more than a decade. Whenever sterling has weakened, it hasn’t made much difference.

UK trade and GBP

In Canada, despite the dollar depreciation, exports have fallen more than one percent to C$44.51 billion since the oil price crash.

In a report titled “The cheaper loonie’s lift to exports: Waiting longer for less,” CIBC’s Avery Shenfeld and Nick Exarhos wrote:

The trade response to currency depreciation will lack its former vigour. The result is that, with a need for exports and related capital spending to supplant housing and debt-financed consumption as a driver of growth, a weaker loonie will be here today, and not gone tomorrow, even if energy prices rebound.

For Canada, the key catalyst is the U.S. economy, which right now is not generating enough demand for what Canada produces.

Recent trade data showed that Canada’s bilateral surplus with the U.S. was largely unchanged regardless of the currency depreciation.

Historic data highlight exports can perform well even when the Canadian dollar is near parity with the U.S. dollar, provided there is demand.

But economists in a Reuters poll have recently downgraded their growth predictions for the U.S., despite widespread expectations for an interest rate hike next month. That suggests Canada might not be able to maintain the 2.5 percent third-quarter growth rate for as long as many expect it will.

David Madani, economist at Capital Economics, wrote in a research note:

With exports losing momentum towards the end of the quarter, and the fallout in the energy sector worsening, the Bank of Canada will be concerned about a potential slowdown in the fourth quarter.

If this trend continues, coupled with weak oil prices persisting well into the future, fiscal policy may really be the only leg left to stand on to stimulate further economic growth.

In the meantime, Governor Poloz might take some solace from the latest robust U.S. payrolls number, as the Fed appears to be doing, and hope it is reflective of an economy about to generate some much-needed demand for Canadian exports — and soon.

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