Exports in November saw a healthy gain of 3.2 per cent, led by energy and automobiles, with much of the gain attributed to U.S. customers.
The Bank of Canada has hammered home three key points over the past few tumultuous months: the European crisis is causing an extreme amount of uncertainty even as the U.S. economy shows whiffs of progress; Europe's potential impact on the Canadian economy is through "indirect channels" like trade and confidence, both here and in the U.S.; and, regardless, businesses should look past the current turmoil and keep investing for the future.
Friday's trade numbers from Statistics Canada were surprisingly positive and underscored the fact that the U.S., Canada's chief export market, is more than on the mend. Canada unexpectedly posted a huge surplus of more than $1-billion in November, Statscan said, and the agency revised the previous month's shortfall, cutting it almost in half. Exports in November saw a healthy gain of 3.2 per cent, led by energy and automobiles, with much of the gain attributed to U.S. customers.
Nevertheless, there are a couple of reasons to be wary, and not just because the export gain in real terms -- i.e. once price changes are stripped out of the equation -- was 1.6 per cent, half as much as the "headline" gain.
First, the U.S. trade balance deteriorated in the same month, in no small part because of a drop in shipments to Europe. With the euro zone on the brink of or already in what many expect will be a long, painful recession, selling to that traditionally reliable market will get harder as 2012 wears on. Moreover, as long as uncertainty about the global recovery persists, it is unlikely the U.S. dollar will lose much steam, posing another hurdle for U.S. exporters.
In normal circumstances, that wouldn't matter so much; there are signs that the once-mighty American economy is getting back on its feet, and domestic U.S. demand is its lifeblood (as it is for the bulk of Canadian exporters). But these are not normal times. American industrial production is up and consumer confidence is rising (to the highest level since May, according to a key gauge released Friday). But it's anyone's guess whether all that can continue if Europe gets worse, or if election-year sabre-rattling undermines faith in politicians' resolve to keep the rebound humming.
So, the sustainability of U.S. confidence is an enormous wild card for Canada, and it is largely dependent on how that other wild card, the European debt saga, plays out.
"The (Canadian) surplus is certainly welcome news, but its staying power is largely dependent on whether the U.S. economy continues to pick up steam," Benjamin Reitzes, a senior economist at BMO Nesbitt Burns, said in a note Friday.
Now to the second reason to be skeptical about what Canada's trade numbers say about the overall direction of the economy.
True, Canada is an export-dependent nation. But imports are a decent gauge of domestic demand -- particularly when the currency is high and, in some cases anyway, goods from other countries are cheaper for Canadians to buy. Imports into Canada slipped back in November, falling 0.8 per cent, erasing almost half of the previous month's increase. A big part of that was a 1.1-per cent drop in business purchases of machinery and equipment which, according to economists at CIBC World Markets, suggests a second consecutive negative quarter for that category.
This is important because as governments cut back and consumers retrench, business investment will be a crucial driver of the recovery this year. Also, as Bank of Canada Governor Mark Carney has argued, investing now will ensure that when the global economy is more solid, Canadian companies are in good position to thrive in a rapidly changing power structure that is shifting toward faster-growing emerging markets and away from the U.S. and Europe. The question remains whether companies will continue to invest, as policy makers have urged and as executives say they intend to in the Bank of Canada's business surveys, or if they get spooked by the global backdrop and hunker down.