By Paul Vieira
Conventional wisdom says Canada’s economy stands to benefit from any pickup in U.S. economic growth, as three-quarters of its exports head southbound. This time around, the boost might turn out to be less than hoped for.
Nomura Securities said in a research note that U.S.-bound exports’ share of total Canadian GDP has slipped to about 18% from 33% a decade ago. When exports to the U.S. of Canadian crude oil are excluded, U.S.-bound shipments as a share of Canadian GDP is even less—roughly 12%.
There are three key reasons for this, Nomura said–an elevated Canadian currency, poor productivity and the emergence of China as a manufacturing powerhouse.
“It seems that the Canadian economy has become less sensitive to growth in the U.S., likely due to a loss of competitiveness,” according to Nomura economist Charles St-Arnaud, a former Bank of Canada analyst, who said this might lead to slower-than-expected Canadian economic growth in 2013 and 2014.
The drag in competitiveness is reflected in years of poor productivity figures, with Canadian productivity roughly 20% lower than the U.S. Canadian unit labor costs have also climbed at a faster pace. Nomura noted announcements over the past month by Japanese car makers to build plants in Kentucky and Mexico, as opposed to Canada.
Nomura said that, during a period of economic expansion in the 1990s, the contribution from exports to the U.S. gave a big boost to Canadian GDP growth—making up 2.4 percentage points of Canada’s average 3.1% growth. But in the 2000s, U.S. exports offered zero contribution to Canadian economic growth, due to a 40% appreciation in the Canadian dollar, increased bottlenecks at U.S.-Canada border crossings and other factors.
In the recovery following the deep 2008-09 recession, U.S. exports have added roughly about 0.6 percentage points to average growth of about 2% annualized during the period, Nomura said, adding most of that contribution came early in the recovery following an outsized decline during the financial crisis.
The Bank of Canada said in its last economic forecast that Canadian GDP growth would regain momentum through 2013 as net exports pick up steam. But it also warned that despite a projected recovery in exports, they are likely to remain below their pre-recession peak until sometime next year due to “ongoing competitiveness challenges,” among them the strength of the Canadian currency.