The following is an excerpt from Scott Barlow's collection of 10 charts that will define the markets in 2017. To view the entire series, click here.
The domestic economy is desperately in search of a growth driver. Rising exports, spurred by a weaker Canadian dollar relative to the greenback, is usually cited as the most likely source. History suggests, however, that a weak loonie on its own will not be enough to spur export growth.
The first chart shows Canadian exports to the United States compared with the value of the domestic currency. I used the U.S. to Canadian dollar value rather than the usual loonie to U.S. dollar ratio because we'd expect that exports would rise along with the greenback, and for the two lines on the chart to track each other.
That hasn't been the case. There is no sustained relationship between the value of the loonie and Canadian exports to the U.S. during the 20 years of data depicted on the chart. This suggests that export growth is not as sensitive to currency values as many believe.
The second chart shows a much clearer relationship. The grey-coloured line shows the year-over-year growth in Canadian exports. The orange-coloured line shows the annual change in U.S. consumer spending. Exports are more volatile, as the grey-coloured line is more choppy, but by and large the trend in domestic exports and the direction of U.S. consumption follow each other.
These charts imply that where domestic export growth is concerned, growth in U.S. demand is a far bigger factor than the value of the loonie relative to the greenback. The Bank of Canada's successful efforts to weaken the Canadian dollar will certainly help make domestic goods more competitive abroad, but without strengthening American demand, export growth is likely to disappoint. Currently, the consensus economist forecast for 2017 U.S. consumer spending points to a 2.5-per-cent increase, a small decrease from 2016's 2.6 per cent. That's still a solid result, but not an accelerating pace. For export sectors this likely points to consistent, but not strong growth.