Exporter confidence has declined further, according to EDC's latest survey of Canadian companies.
The Trade Confidence Index (TCI) has come in at 70.6, down more than a full percentage point from six months ago, and a drop of three points compared to a year ago.
The last time the TCI was around this level was in the fall of 2004, when the enthusiasm of late 2003 and early 2004 had been washed away by the sudden appreciation of the Canadian dollar. Prior to that, the index touched this same level in early 2001, when the world economy was flirting with recession. Confidence fell even further right after the terrorist attacks of September 2001, but recovered quickly thereafter.
The main reason for this drop in exporter confidence is a decline in the outlook for future trade opportunities. Indeed, there is still a measure of confidence that global economic conditions will remain solid and that foreign sales will continue to grow. But what kept the overall TCI from falling even further is a big rise in companies' faith in the domestic economy.
About 48 per cent of companies expect domestic economic conditions to improve, up from only 19 per cent six months ago. And there has even been another uptick in hiring intentions - fully 39 per cent of companies surveyed intend to hire more staff, while only five per cent are planning to reduce staff.
Importantly, the overall figures also mask a significant increase in the disparity of responses concerning the export outlook. In fact, there has been a simultaneous rise both in the number of companies expecting export sales to increase and in the number expecting export sales to decrease. Accordingly, there has been a big drop in the number expecting export sales to remain about the same, as companies have been driven to one extreme or the other.
This heightened disparity in the survey responses is almost certainly being driven by the ongoing boom in Canada's energy and mining sectors, and the corresponding stresses being felt by manufacturers. The smallest declines in exporter confidence were in energy and mining, for obvious reasons, and in information technology, which is seeing a nice recovery.
The biggest declines were in consumer goods, agriculture, food, forestry and base and semi-manufacturing. Consistently, exporter confidence held steady in Western Canada, but declined elsewhere.
Central to these swings in sentiment is the strong Canadian dollar, which is being held up by the same high oil prices that are boosting the fortunes of energy exporters. Fully 92 per cent of exporters consider the dollar to be very or somewhat important to their business. And 63 per cent expect it to appreciate further, a huge rise from 34 per cent in the last survey.
Accordingly, there has also been a big drop in the number of firms planning simply to ride out the strong dollar. Around 22 per cent say they are working to cut costs, while 19 per cent are trying to raise export prices, a big increase from last time.
The bottom line? Exporters are now experiencing what has been in the cards for several months: The world economy is moderating to a more sustainable pace, and competitive pressures are increasing.
Encouragingly, the survey indicates that companies are prepared for the challenge.
(Stephen Poloz is senior vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
