After a difficult and perplexing year, Canada's exporters may finally be seeing the good news that went AWOL throughout most of 2016. It still might not be enough to translate into the recovery in business investment that the Canadian economy sorely needs, as investment faces new uncertainties that trade data can't measure. But investment's loss could be the job market's gain.
Statistics Canada reported Friday that Canada posted a merchandise trade surplus of $526-million in November, the first surplus in more than two years. The result was not only utterly unexpected (the median estimate among economists was a deficit of $1.6-billion), but was also free of any obvious asterisks that would undermine the happy story.
The value of exports jumped 4.3 per cent, largely due to higher volumes. The gains were virtually across the industry gamut. Unlike October, when the trade deficit shrank to $1-billion from $4.2-billion in September, the November improvement couldn't be pinned on a one-off event that twisted the data (such as the September importation of a single $3-billion offshore drilling platform component from South Korea).
Sure, November is just one month. But free of oil platforms and Alberta wildfires and any other obvious distortions, this month looked like the real thing.
Still, some context is necessary here. Even with November's gains, export volumes were down 0.3 per cent for the first 11 months of 2016. Non-energy export volumes were down more than 2 per cent – topping the list of economic disappointments in 2016, as non-energy exports had been widely expected to lead Canada's growth in the year.
Non-energy exporters are scrambling just to get back to where they were a year ago – which suggests that their needs for new production capacity haven't grown. (Indeed, the country's manufacturing capacity utilization rate in the third quarter, the latest data available, was below its year-earlier level.) It's going to take a lot more months in the tone of November to press exporters to invest in new capacity on a broad scale – a key element to the Canadian recovery that remains elusive.
Still, there's reason to be optimistic that more November-like months are to come in 2017, at least in direction if not necessarily in size.
The U.S. economy, home to three-quarters of Canada's exports, is unmistakably humming again after hitting some flat notes in the middle of 2016. There's good reason, too, to expect that the Canadian dollar will remain supportive of exports, despite the slow rise of energy prices. The Bank of Canada looks to be at least a year behind its U.S. central-banking counterpart, the Federal Reserve, on raising interest rates, with the Fed having hiked its key rate last month and looking likely to raise it several more times over the next year. That divergence should keep currency traders favouring the U.S. dollar over its Canadian counterpart.
But to take the leap the Canadian recovery is still waiting for – from export growth to business investment – there looms a new barrier: Donald Trump. The U.S. president-elect's protectionist threats on trade pose a wall of uncertainty for longer-term access to the U.S. market. Any Canadian exporter considering expansion to meet growing U.S. demand will necessarily have to consider this risk, and may opt for shorter-term fixes rather than committing capital to larger-scale, longer-term projects. In that sense, the next year could look a lot like the last, where a confluence of nagging uncertainties kept many businesses nibbling around the edges of investment, replacing and upgrading existing equipment rather than outright expanding.
That could translate into strength in another key element of the Canadian economy: The job market. If companies feeling increasing capacity pressure are hesitant to spend heavily on new facilities, the obvious shorter-term alternative to meeting growing demand is to hire more staff.
It may already be happening. The turnaround in Canada's trade numbers over the past few months – from record deficit to small surplus – has been accompanied by a surge in employment, capped by December's surprise 54,000-job gain, also reported Friday.
It's no coincidence that the biggest job gains have been coming from the services sector – which has experienced much stronger export growth over the past year than the goods-producing sector. (The monthly Statistics Canada merchandise trade report covers only goods trade; data on services exports are only released along with quarterly gross domestic product numbers.)
If we are, indeed, at the cusp of a phase in which goods exports start to catch up with the growth on the services side, then we could see Canada maintain its strong labour market as producers lean on hiring to meet rising demand. Ultimately, longer-term investment will be the healthier outcome for the economy; but until the Trump smoke clears, Canadians will happily take the jobs.