Global trade burst out of the gate to start 2022, eager to leave two pandemic years behind. World export volumes jumped more than 4% over the first six months of the year, despite ongoing supply chain disruptions and the impacts of the Russian invasion of Ukraine. But with the world’s central banks now singularly focused on bringing inflation down from near 40-year highs, energy disruptions in Europe expected to intensify over the winter and the continuation of China’s zero-COVID-19 policies, global trade is expected to weaken heading into year-end.
Against this backdrop, and with global growth expected to fall to a fragile 2.2% in 2022 and reach only 2.6% in 2023, prospects for Canadian exports are projected to be equally lumpy. Through the first eight months of the year, Canadian goods exports were up by phenomenal 27%, compared to a year earlier. However, digging deeper into the numbers, gives reason for pause.
First, the upbeat headline number reflects just how weak goods exports still were in 2021, as global trade continued to be weighed down by the lingering effects of the pandemic. Second, thanks to the spike in energy prices following Russia’s invasion of Ukraine, energy exports—which generally account for a quarter of Canada’s goods exports—jumped by almost 80% through the first eight months of 2022. Account for those two details and the growth surge looks a bit less impressive.
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A look into Canada’s services exports reveals a similar story behind the strong, but somewhat misleading 16% year-to-date growth. Far more than goods, services exports were hampered by COVID-19-related border controls, mandatory vaccination policies and compulsory quarantine periods. These constraints held key transportation and travel components of services exports at artificially low levels through much of the pandemic. With most countries, including Canada, having now eased or eliminated those restrictions, Export Development Canada’s Economics team, which published its annual Global Export Forecast, expects services exports to post solid growth as we emerge from the pandemic.
On aggregate, after jumping to 18% in 2021, Canadian export growth is forecast to reach a solid 26% in 2022, before slowing to under 4% in 2023. Next year’s weakness in energy exports reflects a pullback in prices, as global economic activity slows and headline risk surrounding the war in Ukraine recedes.
Forestry exports will also contribute to the weakness in export growth, as prices continue to fall, and housing starts in the United States slow in the face of higher interest rates. However, there’ll be gains in 2023 as the agriculture sector benefits from an exceptional harvest season, fertilizers exporters expand their production capacity while sanctions restrict Russian and Belarusian competitors, and the automotive sector finally puts supply chain constraints in the rear-view mirror.
After soaring prices played a critical role behind Canadian export growth over the last couple of years, thanks to inflation, COVID-19 disruptions and supply chain bottlenecks, we expect their contribution to the export outlook to ease. Price increases accounted for nearly 16% growth in 2021 and will support an even more stunning 22% growth this year, thanks to surging commodity prices early in the year. But as supply concerns ease and focus shifts to the strength of global demand, volume gains are expected to take over in 2023.
The bottom line?
The outlook for global and Canadian trade is more subdued than has been the case over the last year and a half. While some sectors may be positioned for opportunity in a post-pandemic world, risks to our base-case forecast are tilted to the downside. Slowing consumer demand in North America, a challenging winter for energy security in Europe, aggressive central bank tightening and financial market contagion could weaken the export outlook significantly.
This week, a very special thanks to Ross Prusakowski, director of our Economic and Political Intelligence Centre.
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