Canada is seeing weak exports and strong domestic demand, whereas the U.S. economy is seeing weak domestic demand and strong exports.
On the surface, this looks like an exchange rate story. U.S. export growth (after adjusting for inflation effects) was strong in the mid-1990s, but declined steadily during 1997-2002, as the U.S. dollar appreciated. By 2002, U.S. export growth was in the red, but then the dollar began its trek back to Earth. Exports recovered during 2002-2007, and lately have been growing at around nine per cent.
In Canada's case, exports boomed during the late '90s as the Canadian dollar plunged. Then, exports declined outright during 2001-03, recovering in 2004-05 even as the Canadian dollar was rising. However, our exports have been weak for the past two years of Canadian dollar strength. Inflation-adjusted export growth was just over one per cent in 2007, far below the U.S. performance.
Of course, Canadian exports are highly sensitive to the U.S. business cycle, regardless of what is happening to the exchange rate. The soft U.S. economy during 2001-03 can explain much of our export weakness during that period, and the recent U.S. slowdown is having a similar effect.
Interestingly, though, the U.S. export sectors that have been doing especially well are also doing well for Canadian exporters.
During 2004-07, average export volume growth in Canada for all sectors was just over four per cent. But taking the top 10 U.S. export growth sectors, and applying the same 10 sector selections to Canadian exports, we find that average growth in the last three years was around 11 per cent, a substantial difference.
Some of the leading export sectors for both Canada and the U.S. were cereals, fuels, chemicals, pharmaceuticals, precious stones and metals, iron and steel, and copper and aluminum products.
What this suggests is that markets outside Canada and the U.S. are central to this export story. Indeed, it is helpful to remember that even though the U.S. buys more than 75 per cent of Canada's exports, Canada buys only about 20 per cent of U.S. exports.
U.S. exports to Canada grew by eight per cent in 2007, whereas Canada's exports to the U.S. actually declined by about one per cent.
Meanwhile, Canadian and American exports to markets outside Canada and the U.S. are performing similarly, with growth of around eight per cent, and Canada's reliance on the U.S. is falling steadily as a result.
Of course, Canadian exports to third markets are also being affected by exchange rates, but not by the bilateral rate between the Canadian and U.S. dollars.
While the Canadian dollar was rising against the U.S. dollar during 2005-07, the U.S. dollar was falling against most other currencies. This means that in many important third markets, Canadian exporters did not see anything like the loss of price competitiveness they saw in the U.S. market during this period.
The bottom line? This comparison underscores the benefits of market diversification.
The U.S. slowdown will eventually affect most countries, but export growth to those markets will continue.
(Stephen Poloz is a senior vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
