By Kim Mackrael
OTTAWA -- The collapse in recent years of global commodity prices exposed structural weaknesses in Canada's resource-rich economy after it had lost export capacity and market share in the years leading up to the 2008-2009 recession, a senior Bank of Canada official said Tuesday.
Deputy Governor Lawrence Schembri told an audience at the Atlantic Institute for Market Studies in Halifax, Nova Scotia, that Canada's exports have grown by about 4% annually since the recession. He said that figure is well below the nearly 8% annual export growth that was recorded after recessions in the early 1980s and 1990s.
"Given the magnitude of the [2008-2009] economic downturn, this decline in global trade and Canadian exports was not unexpected," Mr. Schembri said in prepared remarks. "What is now proving more difficult to explain is the weak recovery in exports, especially noncommodity exports, since 2012."
Mr. Schembri said higher Chinese demand for commodities during the 2000s helped spur the expansion of Canada's resource-based industries and exports, giving a strong lift to the country's oil and gas sector. At the same time, the Canadian dollar strengthened against the U.S. dollar and Canada's share of U.S. merchandise imports declined, falling more than 4 percentage points between 2001 and 2009.
The deputy governor's comments come after the Bank of Canada downgraded its economic outlook in October, in part because of a sluggish recovery for nonresource exports. Policy makers hoped Canada's weaker currency would boost foreign demand, but export data so far this year has disappointed.
The central bank now anticipates economic growth of 1.1% this year, followed by 2% in 2017 and 2018.
Mr. Schembri said that while other countries, including China and Mexico, have seen their noncommodity exports to the U.S. increase over the past 15 years, Canada's have remained roughly unchanged in nominal terms. That has left Canada with a smaller share of the U.S. noncommodity market, he said, and has weighed on the country's production capacity. Canada sends about three-quarters of its exports to the U.S.
"Many Canadian firms at this point are reluctant to incur the sunk cost investments to re-enter the U.S. market and to expand their export capacity" before they see a strong increase in demand, Mr. Schembri said. "So we see a number of firms holding back."
Canada's noncommodity exports include industrial machinery and equipment, motor vehicles, pharmaceuticals and financial services.
Despite weaker-than-expected results so far this year, the deputy governor said there is reason to believe Canada's future export performance will strengthen as the global and U.S. economies gain momentum. He said Canada's services sector, in particular, should contribute to export growth.
An improved mix of fiscal and monetary policies has also relieved some of the pressure for the central bank to stimulate the economy in order to reach its inflation target, Mr. Schembri said. Canada's Liberal government has promised to spend heavily on infrastructure and tax benefits in an effort to boost the country's economic growth, which has been sluggish since the 2014 collapse in commodity prices.
The Bank of Canada cut the key interest rate twice last year, but has so far held it steady at 0.5% in 2016. Its next interest-rate decision is due Dec. 7.
Write to Kim Mackrael at email@example.com
(END) Dow Jones Newswires
November 08, 2016 15:18 ET (20:18 GMT)
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