Confidence in the business outlook has improved slightly among Canada’s exporting companies, according to the latest semi-annual survey conducted by EDC. But the reading would have been much higher were it not for the rising Canadian dollar.
The survey was conducted eight weeks ago, in November, and reached 1,000 exporting companies. The overall Trade Confidence Index edged higher, to 74.8 from 73.3 six months earlier, which puts it about mid-way between its historical highs (back in 2000) and its lows (just after the terrorist attacks of September, 2001). The biggest upticks in confidence were in the mining, metals and technology sectors.
There has been a big jump in the number of companies that see global conditions improving and an upgrade in expectations for the domestic economy. However, there has been a slight decline in the percentage of companies that expect foreign sales to increase, from 47 per cent to 44 per cent. A year ago, fully 60 per cent of Canadian exporters expected foreign sales to increase.
The rising Canadian dollar is clearly tempering companies’ expectations for future export sales. Export sales revenues measured in Canadian dollars have declined significantly for most companies, because their export contracts are usually in U.S. dollars.
According to the latest data for November, Canada’s total export revenues have fallen by 6.7 per cent in the past 12 months, while export volumes (the actual number of unit sales) have risen by 1.8 per cent and look to continue rising.
The finding that there has been a net improvement in confidence is also reflected in hiring intentions. Fully 34 per cent of companies surveyed expect to add more staff in the next six months, an even more bullish reading than the one of six months ago. This suggests that even if the rising dollar is cutting into profits and forcing productivity improvements, the strengthening in domestic and global business conditions has been sufficient to produce a net increase in optimism.
EDC’s survey also asked how companies would respond to the higher Canadian dollar. One quarter of those surveyed said that they would simply ride out the storm. Another quarter indicated that they would be seeking to cut costs or increase productivity, and a further 12 per cent said that increasing production volumes would help them make the adjustment. Only 18 per cent indicated that they would be attempting to raise export prices.
The survey found that small companies were more likely to ride it out and to hire more staff, while large companies were more likely to cut costs and curtail hiring. All of this suggests that export volumes are likely to continue to increase in 2004 because exporters are protecting their foreign customers from the effects of the dollar.
The bottom line? The global business outlook continues to improve, but the appreciation of the Canadian dollar has outpaced that improvement, acting as a brake on exporter enthusiasm. With the dollar very unlikely to repeat its 2003 rise in 2004, the balance of exporter sentiment should continue to strengthen in the coming months.
(Stephen Poloz is vice-president and chief economist for Export Development Canada.)
