Economic Development Canada’s latest survey of exporting companies shows another dip in trade confidence. The good news is that the stresses preoccupying exporters are likely to ease over the next six to 12 months.
EDC’s Trade Confidence Index has fallen to 73.3 from 76.1 six months ago and 80.3 last year. Given the perfect storm that has hit exporters – slower growth, SARS, mad-cow disease and the rapid rise in the Canadian dollar – an even larger drop in the index might have been expected.
The declines are broad-based, affecting all sectors except machinery and equipment, which held steady. Nevertheless, confidence is still above the lows set during the global slowdown of 2001.
The dominant concern among the more than 1,000 exporters surveyed is the recent rise in the Canadian dollar, which is behind their pessimism on foreign sales growth.
Hiring intentions have also dropped – only 30 per cent expect to increase hiring, instead of 43 per cent in the last survey, although the low percentage expecting to reduce hiring suggests a plateau, not a contraction.
Events in the past three months suggest that Canada’s exports will not grow as much this year as previously forecast. SARS is now expected to reduce Canada’s tourism receipts by more than $1 billion this year, and the mad-cow crisis could take more than $2 billion out of agri-food exports, depending on when the bans on Canadian beef imports are lifted.
On top of that, the stronger Canadian dollar is cutting into headline sales growth by reducing the prices received for many exports. Our March forecast of five per cent export growth for this year has been trimmed to two per cent as a result; excluding energy exports, which are booming, foreign sales of goods are now expected to decline by one per cent this year.
Even that uninspiring
forecast assumes that exports regain traction in the second half of this year. Fortunately, world economic growth now appears to be picking up, especially in the U.S., but also in Europe and even in Japan.
Leading economic indicators are up, purchasing managers surveys show strength, shipments of cardboard containers are rising, and stock markets and bond yields are up. Meanwhile, the U.S. dollar is stabilizing and gold prices are declining – all signs that the worst is probably behind us in terms of global economic health. The pause is over.
As for adjusting to the stronger Canadian dollar, pessimists
contend that exports will weaken significantly through the remainder of this year. This assumes that Canadian exporters will immediately attempt to extract large price increases from their
customers and lose the sales in the process.
In contrast, our belief is that exporters will accept lower or even negative profit margins for now to retain the business, and then ride out the storm, rebuilding margins through strategic investments and cost cutting over the next few months.
Furthermore, relief is on its way: stronger U.S. growth in the second half of the year will boost export sales and commodity prices, and pull the Canadian
dollar back down toward its fundamental value of around 70-72 cents.
The bottom line? Exporters are understandably concerned about the future. But the perfect storm is subsiding – we should end 2003 on much firmer ground, and see a solid growth year in 2004.
In the past 12 months, Brazil has seen a classic tug of war between hype and substance, and between perception and reality. It is time to declare substance and reality the winners.
The story begins in April 2002, when the vocal leftist Luiz Inacio Lula da Silva emerged as a serious contender for Brazil’s presidency. This prompted dire warnings from various pundits about Brazil’s future economic
performance and credit worthiness.
Global investors sold Brazilian bonds, causing interest rate spreads to widen and the Brazilian real (currency) to depreciate. Each rise in interest rates and
depreciation of the currency made Brazil’s fiscal situation seem even more precarious, producing yet another wave of selling – a vicious circle.
By election time in October, Brazil’s currency had depreciated from 2.5 per U.S. dollar to nearly four, and the interest rate spreads on their bonds relative to U.S. bonds had risen from around seven percentage points to nearly 25. Regardless of the health of Brazil’s underlying fundamentals, such a speculative frenzy could easily have led to an outright default on Brazil’s debt.
So much for the hype. Even at the height of the crisis, it was possible to discern that Brazil’s long-term fundamentals were far better than
markets were assuming. Investors on the ground in Brazil knew the individual members of the Lula team to be much less likely to destroy the foundations of Brazil’s recent economic success than market perceptions or Wall Street rhetoric suggested.
Immediately after his
landslide victory, Lula
appointed a moderate and respected economic team.
Despite an ambitious social agenda, including hiking the minimum wage by 20 per cent, the government has raised its primary fiscal surplus target to 4.25 per cent, and is on track to cut central government program spending from 18 per cent of GDP last year to 16.4 per cent this year. Crucial reforms to the pension system are steadily working their way through the
legislative process.
Investor confidence is being restored by these moves. Bond yield spreads have returned to around eight per cent, and the currency is again less than three per U.S. dollar. Inflation, which surged from eight to 17 per cent due to the enormous depreciation, is already subsiding and is likely to decline significantly this fall.
The central bank has kept monetary conditions very tight to ensure this, and has only recently begun to pare short-term interest rates from their peak of over 26 per cent.
The legacy of the crisis remains, in the form of slow economic growth and unemployment of around 11 per cent. Expectations are for growth of 1.5 per cent or two per cent this year, and perhaps three per cent next year.
However, this assumes that interest rates can only be cut gradually – but the virtuous circle that Brazil has entered could easily allow a much faster reduction in rates, and faster growth.
The bottom line? Brazil’s experience highlights the fragilities inherent in an economy with too much debt and policy uncertainty.
But it also underscores the powerful impact that rigorous policies can have. Here’s betting that Brazil will beat consensus growth forecasts for 2004.
(Stephen Poloz is vice-president and chief economist for Export Development Canada. You can reach him at spoloz@edc.ca)
