As Canada extended its trade winning streak in January, we finally may be at that elusive moment when the export sector takes over as the growth engine the economic pundits have long predicted it would be. But to cement this economic renaissance, we still need that trade growth to prompt export businesses to open their cobwebbed wallets and invest in expansion – and standing in their way is a Trump Tower of worry.
Canada posted an $807-million trade surplus in January, up from a revised $448-million in December. It marked the country's third consecutive surplus – the first in-the-black three-peat since the third quarter of 2014, before the oil shock gutted Canada's energy exports and knocked the wind out of its economic recovery. The month benefited from solid growth in volumes for both exports and imports – evidence of growing demand both in export markets and at home.
Exports hit a record $46.5-billion, fuelled by strong growth in motor vehicles and parts, forest products and building materials, and agricultural and food products. Exports to the United States – by far Canada's biggest market, accounting for about three-quarters of exports – jumped 2.3 per cent in January, and have posted strong gains in three of the past four months. Canada has, apparently, caught the U.S. economy's growth wave.
This is how the Bank of Canada has always envisioned the Canadian economic recovery playing out – albeit somewhat later than the central bank had foreseen.
Growing export demand, particularly outside the battered energy sector, would take over as the key driver of growth as the booming housing sector inevitably came back to earth. But the trade numbers also showed Canada's nagging worry: A dearth of business investment. Canadian imports of industrial machinery and equipment – critical evidence of Canadian businesses spending on upgrades and expansions – fell a disheartening 4.3 per cent month over month, and was down 7.3 per cent from a year earlier.
While Canada's trade rebound is still in relatively early days, these numbers suggest that the rising tide of exports has yet to translate into a rise in spending on expansion, the next key phase in propelling the Canadian economy forward. With exports already at record levels and the trade sector looking more and more to have turned a decisive corner, what more convincing do export business owners need to invest in growth?
The answer may lie with U.S. President Donald Trump, that monolith of trade uncertainty who looms large over every trade-oriented investment decision in North America. While it's hard to quantify in the data, there's little doubt that fears over a rewriting of the rules governing the North American trade relationship are delaying and restraining business investment. And the U.S. January trade data, released at the same time as Canada's, will have played right into the President's protectionist impulses.
The U.S. trade numbers actually sent off a lot of positive signals about the U.S. economy. Yes, the trade deficit widened, to $48.5-billion (U.S.), but only because strong export growth was outdone by even stronger import growth. That indicates very healthy demand indeed at home, as the U.S. economy continues to gain momentum, supplemented nicely by improving growth abroad. Indeed, U.S. exports are at their highest levels in more than two years.
But what Mr. Trump will see is the biggest trade deficit in nearly five years – a move in decidedly the wrong direction for a new president who has sworn to fix his country's trade imbalance. He'll see a surge in the trade deficit with China, which Mr. Trump considers his country's trade nemesis. He might even notice that the U.S. trade deficit with Canada, his country's biggest export market, was its widest in more than two years.
"Today's data shows there is much work to be done," Mr. Trump's Commerce Secretary, Wilbur Ross, said in a statement Tuesday. "President Trump has made free and fair trade a central part of his agenda, and correcting this imbalance is an important step in achieving that goal."
It's that promise/threat that will at the very least keep a leash on business investment, until businesses have a clearer view of where the Trump administration is going to take this.
All of this could be fuelling the strong employment growth in Canada over the past few months. For businesses that are feeling squeezed by rising demand from export customers, but are hesitant to spend on new equipment and new facilities, the obvious alternative is to hire more people.
For a Canadian economy that has gone through a couple of disappointing years, there are certainly worse problems than strong trade numbers and a surge in job growth. But as to how long these can be sustained, the ball looks to be very much in Mr. Trump's court. That's little comfort to anyone – let alone businesses facing investment decisions.