Confidence matters when it comes to economic outcomes. Confident consumers are more likely to buy big-ticket items, like cars and houses, while self-assured business owners are more apt to make investments to expand their productive capacity. But if you lack confidence, you’re more wary of taking risks and making decisions. 

An Export Development Canada (EDC) biannual survey tracks confidence with a focus on a unique group of businesses in Canada: those that are currently exporting or want to export. Since they have money riding on global economic developments, these companies offer a valuable perspective. 

EDC surveys 1,000 of these companies in our Trade Confidence Index (TCI). The TCI is a forward-looking survey that captures insights not available in traditional statistics. We gauge exporters’ expectations for the future, their evolving global strategies, and their views on emerging issues.  

Canada’s economy depends heavily on international trade to support our living standards, so the TCI is an informative economic indicator. Given recent trade turbulence, the latest results are particularly noteworthy.

Weaker exporter outlook

The key finding from our mid-year 2019 survey is that Canadian exporters are feeling more pessimistic about the near-term outlook. Trade confidence fell by 5.3%, to sit at its lowest level since the European debt crisis more than seven years ago.

Canadian trade confidence is at a seven-year low

Canadian Trade Confidence at seven-year low


All five components of EDC’s index dropped, continuing the movement in the previous survey. The decline was broad-based, led by a weaker outlook for international business opportunities, but also reflects softer expectations for the Canadian and global economies. 
 

All 5 TCI components fell, led by the weaker outlook for international business opportunities

All 5 TCI components dropped

These results suggest that a confluence of factors have dragged down the outlook according to Canadian exporters, including: 

  • slowing momentum in global trade; 
  • elevated protectionism; and 
  • trade policy uncertainty. 

Tariffs and trade barriers remain the top concern reported by Canadian companies doing business abroad—ahead of perennial issues such as finding skilled talent, complying with government regulations and obtaining financing. 

More than one-third of respondents say protectionism is affecting their export and global investment strategies. The affected group highlights recently imposed tariffs, “Buy American” policies, and difficulties exporting to the United States—by far, Canada’s largest trading partner. A similar share (31%) say the ongoing U.S.-China trade dispute is negatively affecting their business. 

Looking ahead, few Canadian exporters see any respite on the horizon. Most respondents (92%) expect protectionism to worsen or to stay the same in the next 12 months.
 

Most Canadian exporters expect protectionism to stay the same or increase

Most Canadian exporters expect protectionism to stay the same


One bright spot since our survey was conducted in March and April is the elimination of the North American steel and aluminum tariffs. We found these tariffs were having negative impacts for some companies in the affected industries.

CUSMA uncertainty

These tariffs were also seen as a major obstacle to passing the Canada-United States-Mexico Agreement (or CUSMA, which will eventually replace NAFTA). Since their removal, Mexico has now ratified CUSMA—despite the recent threats of additional tariffs, which weren’t directly related to trade, but rather to concerns regarding immigration from Central America on the southern U.S. border. With Mexico crossing the CUSMA finish line, ratification in Canada and the U.S. is needed to finally pass this agreement into law.  

Of the exporters we asked, a slim majority (55%) expect CUSMA to become law in 2019 or 2020, while a notable minority (19%) do not expect CUSMA  to pass.


A slim majority of respondents expects CUSMA to pass into law in 2019 or 2020

A slim Majority of respondents expects CUSMA to pass into law in 2019 or 2020

Uncertainty regarding this trade deal’s fate is holding back some investment plans in Canada. Among those that say CUSMA negotiation has impacted their investment plans, “delay investment” was the most common response (from 32% of those respondents). 

New trade deals may support diversification

After ramping up during the CUSMA negotiations, the share of businesses planning to export to a new market or invest abroad has returned to historical averages. Perhaps this reflects some complacency setting in for Canadian exporters. Diversification efforts are nonetheless continuing with respondents looking to expand exports, or to start exporting to countries in Canada’s new trade deals with Europe (the Comprehensive Economic and Trade Agreement or CETA) and in the Asia-Pacific region (the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP).

 

Canadian exporters’ elevated diversification push during the CUSMA talks has subsided

Canadian exporters’ elevated Diversification push during the CUSMA talks has subsided

Bright spot in Atlantic Canada

On a positive note, our survey was not all bad news. Although trade confidence fell in most regions of the country, it was up modestly in Atlantic Canada, where there’s more optimism about international business opportunities. I see a few possible reasons for this result. First, Atlantic Canada is well-positioned geographically to capitalize on Canada’s new trade deal with the European Union. Second, in recent presentations in that region, I heard several anecdotes from companies that Canada’s seafood sector has benefitted from new opportunities, arising from China’s 25% tariff on U.S. lobsters, as part of their ongoing bilateral trade battle. 

Implications for Canadian exports

Looking ahead, the share of Canadian firms expecting their exports to increase in the next six months fell to 55% from 64% in the last survey. And while investment plans are also losing momentum, exporters’ hiring intentions remain robust, despite growing difficulties accessing skilled labour. It’s possible that, instead of making needed investments, we’re seeing firms in Canada substitute labour for capital, which might explain the surprisingly strong job numbers we’ve seen in recent months, despite subdued output growth.   

According to analysis by Capital Economics, “The sharp fall in EDC’s Trade Confidence Index does not bode well for Canada’s non-energy exports or, by extension, the loonie,” as shown in their chart below.

 

EDC Trade confidence index and non-energy exports

EDC trade confidence index and non-energy exports

However, Canada’s exports have posted an impressive start through the first five months of 2019. We’ll be following these developments closely. For more details on EDC’s survey results, what they mean for Canadian business, or to ask us questions, join me and my EDC colleagues Carolyn Carson, Jennifer Topping, and Phil Turi for a webinar on July 11 at 1 p.m. EST.

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