Amid all the uncertainty these days, if one thing is certain, it’s that we’re witnessing the end of a decade of extraordinary monetary stimulus. Notwithstanding its January downshift, the Bank of Canada has raised rates by 425 basis points since last year, bringing its policy rate to 4.5%. To think that these actions will do anything other than what they’re intended for would be a fool’s game. And so, as rate hikes flow through, expect to see a gradual weakening of Canada’s domestic economy.
In that context, though, trade will be more important than ever to help support Canadian growth and drive wealth creation in this country. But here’s the rub, over the past few decades, we’ve actually seen the share of Canadian gross domestic product (GDP) and jobs supported by exports decline. Since the turn of the millenium, exports’ share of GDP have fallen from 38% to 30%, in 2021.
And why is that? Well, while Canadian exporters are now more globalized than ever, and continue to open up to the benefits of sourcing from abroad and diversifying their supply chains, Canada is losing market share. In 2000, we accounted for roughly 4% of the world’s merchandise exports, punching way above our weight, when you consider that we generate just slightly more than 2% of global GDP. By 2021, that share was almost cut in half, to just 2.3%.
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While you’d expect to see our piece of the pie get smaller, as other markets emerge, our decline is even more pronounced than the decline of other developed markets. And for a small, open economy like ours, that depends on international trade as much as we do, this weak performance is having real impacts on Canada’s growth potential.
Part of the issue is that most of our exports go to a handful of traditional trade partners. In fact, if you add up all our exports to advanced economies, you’d see that they account for almost 90% of our total foreign sales. Even though those markets make up slightly more than 50% of the global economy and only 14% of the world’s population. So, in investment terms, you’d say that this is a bit of an overweight allocation.
The problem with being overweight here is that these countries grow at a slower pace, having moved into the later stages of development and being home to generally older, and shrinking populations. This impacts the pace at which these markets consume more stuff, and the pace at which they buy that stuff from the rest of the world. In fact, if you look back over the last decade, Canada’s export growth to advanced economies has been fairly modest. And, with long-term growth potential in those markets of around 2%, there’s a pretty good chance that’s not going to change much.
So, if we’re going to create trade, create more wealth for the Canadian economy, as our domestic economy faces the headwinds of tighter credit conditions, we have our work cut out for us. But here’s the good news. Long-term growth potential in developing markets tends to move at a 5%-6% clip, and in some cases even higher than that. And this has the capacity to transform our economy.
The bottom line?
In our latest Global Economic Outlook, EDC Economics expects Canada’s domestic economy to shift to a lower growth track. As a result, we’ll have to lean even more on trade to help support economic growth. But weaker global growth prospects and our declining market share mean that we’re going to have to think a bit more outside the box.
This may require us to look at faster growing developing markets. Want to know more? Watch for my March 2 commentary from Singapore, when I’ll explore the opportunities in emerging Asian economies, and what they might mean for Canadian exporters and export-ready companies.
This week, a very special thanks to Joël Dido, investment officer at the International Finance Corporation (IFC).
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