Section 3: Feature article
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The post-recession recovery of Canadian exports, 2009-2011
by Philip Cross* 1
One of the most striking features of the 2008-2009 recession was the synchronised slump in trade around the globe, with most industrialized nations posting export declines of between 30% and 40%. Canada was no exception, with exports plunging 27% in just three months between October 2008 and January 2009, and a total peak-to-trough loss of 37% by the time trade bottomed out in May 2009.
However, global trade flows were nearly as quick to recover in the last two years. By the second quarter of 2011, the United States saw exports hit a new record high, recouping all of their recession losses. In so doing, the US joined other major exporters in the EU (notably Germany) and in Asia in recovering all of the ground lost during the recession. Canada is an exception, with exports in the second quarter of 2011 having recouped just over half (53.5%) of their recession losses. This paper explores why exports from Canada have lagged during the recovery by examining the performance of exports by major sector to our largest export markets. It then compares these structural features of Canadian exports with some other large exporting nations.
International trade during the recession
An earlier paper in the CEO examined why exports fell so sharply during the three quarters of the 2008-2009 downturn. 2 While export demand fell for all major commodity groups, 84.4% of the drop in nominal exports was concentrated in energy, industrial goods and autos (altogether, these sectors contributed $34.7 billion out of the total decline of $41.1 billion in goods exports). While exports fell to all major countries, the US accounted for over 80% of the drop in Canadian exports, reflecting the importance of the US market for key exports such as energy and autos.
While the recession in the US was the most severe in the post-war era, with declines of 5.1% in real GDP and 10% in industrial production, this does not fully explain why trade flows fell by so much more. Some of the larger decline in Canada's exports reflects the sharp drop in commodity prices for Canada's major exports, especially energy and metals. 3 Research on why global exports fell so much more than output has also focused on two additional factors. One is that inventories for traded goods fell faster than domestic output or final demand. 4 Another is that exports rely heavily on trade finance, and borrowing costs soared (or became unattainable at any price) after the financial crisis worsened in September 2008. 5
Energy, industrial goods and autos led the drop in exports during the recession, but these same three sectors have led the recovery of exports, rising by 51.0% from the second quarter of 2009 to the second quarter of 2011. This rebound of $23.5 billion in absolute terms means that these sectors have recouped two-thirds of their recession losses (ranging from 54% for energy to 82% for industrial goods and 92% for autos, although the latter remained well below its all-time high set in 2007).
While the sectors that were most affected by the recession have led the recovery, the other four export sectors overall have continued to shrink during the recovery. Altogether, exports of agricultural products, forestry, consumer goods, and machinery and equipment fell by 12.4% or $5.6 billion during the recession. But over the eight quarters of recovery, they have declined by another 2.4%, or $1.0 billion.
Since the weakness in these lagging sectors helps explain much of the slow recovery of overall exports, this paper next takes a detailed look at each of the components, starting with machinery and equipment.
Machinery and equipment is the largest of the four sectors where exports have lagged in the recovery, with sales abroad of $18.8 billion in the second quarter of 2011 compared with $20.0 billion in the second quarter of 2009 and $23.3 billion before the recession. Some of their weakness in the recovery is due to lower prices, but the volume of machinery and equipment exports has shown no change over the last seven quarters.
No component of machinery and equipment exports has grown in nominal terms since the second quarter of 2009. Telecommunications equipment has declined more in the recovery than during the recession. Industrial and agricultural machinery remain well below their mid-2009 level, while office machinery has only levelled off after falling by nearly a third during the recession. Some of this widespread weakness reflects the lag in the recovery of business investment, especially in the US where it did not bottom out until late in 2009. The lag in business investment is typical of recoveries, partly because of the long time period between orders to purchase and the delivery of some large capital goods. Aircraft are a good example; exports peaked at $4.3 billion in the first quarter of 2009, after the recession began, and have not yet begun to recover, hitting a 13-year low of $2.8 billion in the second quarter of 2011 (the recent influx of new orders for aircraft augurs a rebound for aerospace exports).
Agricultural products and consumer goods together posted a further decline of $0.8 billion during the recovery after losses of $0.6 billion during the recession. A $0.1 billion dip for agricultural products is mostly explained by the vagaries of the wheat harvest. Exports late in 2008 and into 2009 were sustained by the bumper crop harvested in the autumn of 2008, which boosted export values even as the world economy slipped into a steep downturn. A relatively poor crop last year continues to dampen exports, even as grain prices rise on commodity markets. Consumer goods exports are driven by pharmaceutical products, which account for nearly half of this sector. Demand for these goods was unusually high in 2009 due to the H1N1 influenza, and sales have since returned to more normal levels.
Forestry products have shown a modest recovery from $4.7 billion to $5.7 billion over the last eight quarters. However, they remain below their pre-recession level of $6.5 billion, and barely half their record high of $10.9 billion reached early in 2005. Lumber exports have regained the $2.3 billion level of the third quarter of 2008, but remain less than half their level during the peak of the US house-building boom in 2005. Newsprint exports have declined by one-third during the recession and into the recovery, and have hovered just below $1.0 billion every quarter since mid-2009.
Of the three sectors that both led exports into the recession and the subsequent recovery, energy exports have fared the worst. Energy exports were nearly halved (-49%) during the recession, largely due to the collapse of prices. Since the recovery began, energy exports have recovered just over half of these losses. Crude oil has led the way, nearly doubling from their recession low to a record $17.7 billion in the first quarter of 2011 (supply disruptions reduced exports in the second quarter). This reflects both the strong recovery of oil prices and a substantial increase in pipeline capacity to the US.
While oil had completely recovered early in 2011, energy exports have been dampened by lingering weakness in natural gas, where exports of $3.7 billion in the second quarter were barely above their recession lows and only 40% of their pre-recession level of $8.9 billion. Sharply lower prices explain most of this drop, partly the result of new techniques to exploit shale deposits. Electricity exports also remain half of their pre-recession level, at $0.5 billion in the second quarter of 2011.
Automotive product exports have posted slightly slower gains during the recovery (49% growth) than industrial goods and energy exports (both at 51%) over the last eight quarters. Still, auto exports have recouped 92% of their losses during the three quarters the Canadian economy was in recession, versus an 82% rebound for industrial goods and 54% for energy products. However, this picture of a more complete recovery in autos is misleading, because the auto sector began its slide into recession long before the rest of the economy. So while auto exports have almost recovered to their level of the third quarter of 2008, they remain 30% below their cyclical peak in the third quarter of 2007 (itself 19% below the record high set in the first quarter of 2000). By comparison, the pre-recession level of exports of industrial goods in the third quarter of 2008 was an all-time high, reflecting sharply rising prices for metals and fertilizer, so their recovery leaves them near peak levels.
Within auto exports, there has been a marked structural shift in the composition of the vehicles being shipped. The long-term change of vehicle output in Canada from trucks to cars saw the value of truck exports dwindle from $4.0 billion as recently as late 2006 to $2.1 billion when the recession began. The closing of a major truck plant in Oshawa in 2009 lowered truck exports to $1.0 billion in the second quarter of 2009, and they have since dwindled to $0.6 billion in the second quarter of 2011 (it should be noted that the definition of trucks in international trade data does not include crossovers and SUVs, which are allocated to trucks in most classifications of domestic sales and output 6 ). While truck exports have shrunk, passenger car exports rose to $9.8 billion in the first quarter, nearly double their recession low of $5.4 billion, and close to their all-time high of $10.1 billion set in mid-2007 (like oil, supply disruptions lowered exports in the second quarter, reflecting the impact of a shortage of parts from Japan).
Of all the major sectors, exports of industrial goods are the closest to their all-time record, standing just 7.0% below their peak set in the third quarter of 2010. Metals have led the recovery, notably precious metals exports which, at $4.3 billion in the second quarter, were nearly double their pre-recession level. Most of this increase reflects the rising price of gold. Most other metals are close to recovering all their recession losses, notably nickel and iron ore.
Exports by region
Much of Canada's slow recovery of exports reflects its dependence on markets in the US for nearly 75% of its exports. With the slow pace of recovery in the US, exports south of the border have recovered just under half their recession losses. By contrast, Canadian exports to the rest of the world had returned to their pre-recession level of $31.3 billion by the fourth quarter of 2010. The more complete recovery of exports outside of the US reflected both their much faster growth since mid-2009 (32% by the end of 2010 versus 18% to the US) and a smaller loss during the recession (24.2% versus 34.9% to the US). While Canada's relative dependence on the US has been a disadvantage in the current cycle, this has not always been the case. For example, in the year after the Asian financial crisis broke in mid-1997, Canada's exports to non-OECD countries fell 22%, while exports to the US rose 12%.
Exports outside of the US dipped 5.9% in the first half of 2011, reflecting the slowdown in growth in Europe and the disruption of trade with Japan after the tsunami in March. Exports to emerging markets remained equal to their pre-recession level of $12.4 billion. However, these developing countries still accounted for only 11.3% of Canada's exports in the second quarter of 2011. With exports to the US buoyed in the first half of 2011 by new pipeline capacity for energy exports, the recovery of Canada's exports to the US and the rest of the world were about equal (26.5% versus 24.4%) by the second quarter of 2011.
Other reasons besides our reliance on specific exports to the US market contributed to the slow recovery of Canada's exports. One factor that has dampened nominal exports in Canada was the recovery of the exchange rate. After falling to 80 cents (US) during the depths of the recession, the Canadian dollar has since returned to parity with the US greenback. Since their recovery began in mid-2009, export prices for Canadian goods have risen 9.7% (after falling 16.7% during the recession), but this was almost entirely due to soaring prices for energy and metals. Prices for manufactured products have fallen steadily, with declines of 6.2% for machinery and equipment, 0.5% for consumer goods and 13.4% for autos. The drop in prices for factory goods was driven by the higher exchange rate, which lowers the number of Canadian dollars an exporter receives for goods shipped to the US market (each US dollar earned buys fewer Canadian dollars as the exchange rate rises). Of course, other factors also dampened prices, such as the ongoing decline in the price of high-tech goods and changes in the mix of vehicles exported (the Laspeyres index for auto exports fell 11.0% since the recession ended, versus the 13.4% drop in the Paasche index).
Exports by other nations
The slow recovery of Canadian exports contrasts with that for other major nations. Exports from the US reached $361.3 billion in the second quarter, 7 surpassing their pre-recession level as exports rebounded 42.5% after a 26.8% drop during the recession. The faster recovery of trade in the US partly reflects both the composition and the destination of its exports.
Well over half of US exports were destined for emerging markets, including Asia and the Pacific Rim (23.8%), Mexico and South America (23.5%), and other emerging markets (7.3% including Russia, Turkey and the Middle East). 8 These economies have recovered much faster than the developed markets in North America, Europe and Japan, which accounted for 84.6% of Canada's exports in 2010. For example, US exports to Pacific Rim countries and South America have both surpassed their pre-recession levels, led by rapid gains in shipments to China, South Korea and Brazil. By comparison, US exports to North America and Europe have not quite regained their pre-2008 level.
The structure of US exports is much different than Canada's, reflecting both its different comparative advantages (energy is Canada's largest export) and the dominance of demand for US exports from emerging markets. Capital goods are the largest US export, especially aerospace and high technology products, followed by industrial goods. Together, these two components account for almost two-thirds of US exports. Consumer goods exports from the US are half as large as auto exports, while in Canada auto exports are nearly four times larger than consumer goods. Agricultural exports from the US are more important than auto exports, while autos are over 50% larger than agriculture in Canada's exports. This reflects that the US is the world's leading exporter of commodities such as wheat, corn and cotton.
Exports from the European Union are not as diversified as the US. Exports of machinery and vehicles and other consumer goods account for nearly two-thirds of all goods exports; adding in chemicals accounts for 82.9%. 9 However, the EU's export markets are more diversified. The US is the leading market, with 17.9% of exports in 2010. China vaulted into second place, with 8.4%. Other important emerging markets for exports include Russia (6.4%), Turkey (4.5%), India (2.6%), Brazil (2.3%) and South Korea (2.1%). While exports to the US have not returned to pre-recession levels, exports to emerging markets have, led in 2010 by China and Brazil. Germany dominates EU exports, contributing 28.1% in 2010, reflecting its strength in machinery and vehicles. The UK, France and Italy account for another third of EU exports.
Like most nations, Canada's trade suffered large losses during the 2008-2009 recession. However, the recovery of Canadian exports has been slower than in many other nations over the last two years. This largely reflects the sluggish recovery of the US economy, notably for key markets such as natural gas and lumber. Canada's exports to the rest of the world had recouped most of their recession losses by the end of 2010. This pattern reflects the faster recovery of emerging markets relative to to the US economy. It is also encouraging for Canada's ability to compete in US markets when demand strengthens.
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