Trade numbers point to healing global economy

The global scourge of trade imbalances that have hampered economic recovery are finally starting to move in the right direction.

International trade deficits in the United States and Canada narrowed by more than expected in October, and China managed to decrease its massive trade surplus to $22.9-billion (U.S.) in November from $27.15-billion in October amid evidence its roaring economy remains strong.

The prevailing theme is one of a global economy that is beginning to rely less on the struggling U.S. consumer and more on fast-growing emerging markets, particularly China.

U.S. exports rose to their highest level in two years, as American businesses sold more to developing economies, shrinking the U.S. trade deficit by 13.2 per cent to $38.7-billion (U.S.), while China purchased a record amount of U.S. goods.

A weaker U.S. dollar "should remain a supportive influence on U.S. exports in the fourth quarter, along with ongoing demand from the global economy, particularly emerging markets," Christos Shiamptanis of TD Economics said in a report.

In a welcome sign that Canadian business is starting to reduce its reliance on the shaky U.S. economy, Canada's trade surplus with the U.S. dropped to $1.1-billion - its lowest level since September, 1992. Canada's overall trade deficit narrowed to $1.7-billion (Canadian) from $2.3-billion in September as exports grew by 3.1 per cent. Exports to countries other than the U.S. jumped by more than 10 per cent from the month before as the U.S. accounted for only 70 per cent of October exports.

"This report is certainly welcome news after three straight months of $2-billion-plus deficits. The shift away from reliance on the U.S. is also a positive, but they still take in the bulk of Canada's exports, keeping our economies closely aligned," said BMO Nesbitt Burns economist Benjamin Reitzes.

"After two challenging quarters, the trade picture looks as though it improved in Q4."

Underscoring the economy's increasing reliance on commodities, a 13.7-per-cent surge in exports of Canadian industrial goods and materials led the gains. As the price of gold continued to hit new highs, exports of precious metals rocketed 45-per-cent higher.

Economists expect demand for commodities to remain strong, particularly from fast-growing developing countries, which could continue to reduce Canada's still overwhelming reliance on the U.S.

Bank of Canada Governor Mark Carney has called for Canadian exporters to diversify their customer base and look to fast-growing countries in Asia for new export markets.

Bill Hammond, CEO of Hammond Power Solutions Inc., a Guelph, Ont.-based manufacturer of transformers, said while about 60 per cent of his business is still with the United States, he is working feverishly to tap into new markets in Europe, Asia - particularly India - and, eventually, Latin American countries like Brazil and Argentina, mainly through acquisitions.

"We actually identified this as a strategy two years ago, as we started to go into the recession," Mr. Hammond said in an interview. "Most of this decade will see slower growth rates in the United States than we've seen for many decades. We've got a vision of growing to $500-million in sales within five years (from about $200-million projected for next year), and I don't think we're going to be able to attain that with total dependence on North America, especially given the state of the U.S. economy."

Nowhere is that shift more evident than in British Columbia's forestry sector. The battered industry has switched its focus to producing wood products for the Asian market and in September, exports to China and Japan were on par with the U.S. for the first time.

Pat Bell, B.C. Minister of Forests, Mines and Lands, said "We've worked hard to lessen our reliance on the market south of the border, and that plan is clearly paying off now with the U.S. housing market in a prolonged slump."

Canadian imports also rose in October, climbing by 1.2 per cent with higher energy imports accounting for much of the increase. Machinery and equipment imports remain on an upward trend, up 21.4 per cent from a year ago, a 13-year high. According to BMO's Mr. Reitzes, Canadian businesses are taking advantage of the strong loonie to invest in productivity-enhancing goods.

Chinese data gave no indication of a slowdown in the world's second-largest economy. In fact, the trade figures provided fresh evidence that China's economy may be overheating, and more tightening measures will have to be implemented to keep it in check.

China's central bank raised the amount of reserves that commercial banks must keep by 50 basis points on Friday. (A basis point is 1/100th of a percentage point.) It was the sixth time this year the central bank has raised reserve requirements to remove liquidity from its monetary system.

The move came as China said exports grew by a faster-than-forecast 34.9 per cent in November from the same month last year. Demand from emerging economies in Asia drove the gains. China's imports also rose, jumping 37.7 per cent.

The strong trade data, coupled with continued high lending rates and consumer price inflation levels expected to hit 5 per cent, suggest that China will again raise interest rates and allow more appreciation of its artificially undervalued currency, the yuan.

"We expect to see more urgency from Beijing in the months ahead as tackling inflation becomes a greater priority, with both rate hikes and currency appreciation likely to be employed," said Brian Jackson, emerging market strategist with RBC Dominion Securities in Hong Kong.