Trade confidence is up? It hardly seems possible. Earlier this year, maybe, when a bevy of strong economic reports set the world abuzz with recovery talk. But now, with heightened concern about southern Europe’s public finances, worries about China’s performance, new cracks appearing in U.S. demand, tumbling commodity prices and a stubbornly strong Canadian dollar? In this context, a rise in Canadian trade confidence seems out of place. Why the increase?
Recent moves in Export Development Canada's Trade Confidence Index (TCI) have been nothing if not dramatic. A sharp tumble that began in the fall of 2007 sent the TCI downward to a reading of 61 a year later, its lowest level ever. The move foreshadowed the drubbing that was in store for exporters in 2009. But then a sturdy rebound lifted the TCI up to 77.4 by the fall of 2009, one of the highest readings on record.
From that position of strength, the TCI climbed even further in the Spring 2010 survey. Conducted in late April and early May, the survey pushed the TCI up to 78.8, its best result since the spring of 2002. Given the concurrent onset of global turbulence, the result appears behind the times – until the index components are examined. True to unfolding external conditions, the index got no help from its international elements. Exporters’ perceptions of both world economic conditions and global business opportunities faded in the spring survey, and expectations for near-term export sales were flat.
As international markets lost their shine, exporters turned to the comparatively robust home market for help. Fortunately, Canada’s impressive domestic market has not disappointed them. The vast majority are bullish about near-term domestic economic conditions, and these perceptions seem to be translating into actual sales. Almost half of the exporters surveyed expect Canadian sales to increase in the coming six months, and most of the remainder expect sales to remain the same.
Spring 2010 survey results were mixed across industry groups. The mining and oil & gas sectors saw the largest increase in confidence, followed by the transportation sector and companies in the forestry and agri-food sectors. Results were flat for both the information and communication technology and infrastructure sectors. Light manufacturing actually saw a marginal dip in confidence.
Large exporters were the most bullish in the recent survey, thanks to a significant jump in domestic sales expectations. Medium-sized companies were close behind, thanks to a large jump in overall confidence. However, the poll showed that confidence among small firms didn’t budge. Across Canada, confidence surged in the West and saw a decent increase in Quebec. Gains were more modest in Ontario, and Atlantic Canada swooned as international prospects tumbled.
Exporters seem to have accepted that the high Canadian dollar is here to stay. Over 80% of respondents expect the loonie’s level to stay the same or increase. While 37% of respondents are just gritting their teeth and riding out the high currency, a rising number are sourcing more inputs from foreign suppliers, cutting costs, changing their production systems and actively hedging.
The bottom line? In spite of wobbles in world growth, Canadian exporters are taking refuge in strong local demand. It’s a decent stop-gap, but at best a temporary substitute for revived global demand.
The views expressed here are those of the author, and not necessarily of Export Development Canada.