IN BRIEF

  • The plunge in oil prices since mid-2014 is clearly negative for Canada’s long-term economic prospects. However, economic diversification will offset the impact of reduced energy sector activity and a rise in non-energy exports will mitigate the effect of lower energy exports.
  • The US will remain Canada’s main trading partner, given the very close relations between the two economies. However, Canada will gain market share in some emerging economies, especially in Asia.
  • Canada will diversify its electronics industry away from a narrow focus on communications equipment. Canada’s solid economic prospects and trade liberalization efforts mean trade will rise in economic importance in the long-term.

Very close economic relations with the US and an increasing foothold in emerging markets, together with past trade agreements, will continue to boost trade flows in the longer term. In addition, a push to diversify the economy more towards exports and business investment will mitigate the impact of slower energy export growth. Trade agreements that remain in the planning have the potential to further underpin growth in trade flows in the years ahead.

LONG-TERM OUTLOOK

Economic Outlook – The oil price plunge since mid-2014 will weigh heavily on the outlook for the Canadian economy. Though its direct contribution to GDP growth and employment are limited, spill-over effects, on investment for example, will weigh on the long-term growth outlook. Furthermore, when combined with a weakening currency, lower oil prices represent a significant negative terms of trade shock.

But a weaker currency, lower oil prices and strengthening economic activity in the US(Canada’s most important trading partner) will boost non-energy exports over time. In addition, the proposed Trans-Pacific Partnership (TPP), if implemented, a trade deal with South Korea and bilateral trade negotiations with other countries will underpin export growth as these expand access to, and liberalize trade with, fast-growing economies in Asia. Meanwhile, private consumption is expected to grow more slowly than in the past, weighed down by high household indebtedness, and despite interest rates now set to remain lower for longer, consumption is unlikely to improve quickly. Deleveraging will take time and act as a drag on consumer spending. Lastly, with household debt burdens high and prices signalling overheating, housing sector activity is expected to cool in the coming years.

However, tepid world oil demand growth and a need to rebalance global supply will lead to subdued Canadian oil prospects and impede growth into the long-term. We forecast real GDP growth to average 2.1% in the decade to 2030.

Export Corridors to watch – With energy accounting for about a quarter of total export growth in the decade to 2030, low oil prices and expectations of only a subdued rebound will weigh on exports in the coming years. However, a weaker Canadian dollar and lower oil prices will support non-energy export growth in the years ahead. Machinery and transportation exports are expected to grow in importance in export flows, particularly as US demand rises, although the automotive sector faces some competitiveness issues. And the TPP and Transatlantic Trade and Investment Partnership (TTIP) agreements have the potential to bring down trade barriers and expand Canada’s reach in existing markets and gain a foothold in new economies.

Sector contribution to increase in exports

The US is by far Canada’s most important export market, taking around 75% of its overall exports, due in part to long-standing free trade agreements as well as proximity. Given the extensive economic interlinkages between the two countries, the US is expected to remain Canada’s most important export destination over the forecast period. Canada is also expected to maintain its foothold in developed markets such as the UK (albeit this is to some extent driven by gold) and Japan, but China will remain Canada’s second most important market.

Top 5 Hotlist Export Destinations

Rank

2013

2030

1

USA

USA

2

China

China

3

UK

UK

4

Japan

Japan

5

Mexico

India

*Ranking among the 24 trade partners covered in the HSBC Trade Forecast

Upbeat long-term emerging market growth prospects and Canada’s entrenched position as a commodity and manufactured goods exporter mean that Canada will gain a foothold in key emerging markets, especially in Asia. We forecast that that the fastest-growing export destinations of the 25 countries included in the forecast will include China, India and Indonesia (exports to which will rise by at least 10% per annum), as well as Korea and Brazil (both around 8% per annum) in the decade to 2030.

Import Corridors to watch – At the sector level, the mix of goods imports is not expected to change much in the coming years. Industrial machinery will remain the most important import sector, expected to contribute more than 20% to total import growth over 2015-30. This will stem from business investment necessitating equipment imports from abroad, as the slow rebound in oil prices also leads to a slow but steady increase in energy sector capital expenditure. Transportation equipment, such as automobiles will contribute about 20% to total import growth in the decade to 2030, in part due to rising household spending. Lastly, we expect Canada to import less petroleum products over the forecast period, and that this sector will be less important for imports as domestic supplies and increased refinement ability curb the need to import energy.

Sector contribution to increase in imports

The US will remain Canada’s largest source of imports, with Mexico in third place, due to long-standing trade agreements, the high degree of economic interconnectedness and geographic proximity. Canada’s main trading partners have, to a large degree, been advanced economies in the past and this is likely to remain the case. But Canada will also experience growth in imports from emerging markets, particularly Asia, as Canadian firms take advantage of cheaper goods manufactured there. The implementation of the TPP would also help underpin import growth from these economies. We forecast that import growth from developed economies such as the US, UK and France will grow at a fairly subdued rate of 6% per annum in the decade to 2030 while imports from emerging markets such as China, which will remain Canada’s second most important import origin over the forecast period, and Vietnam will grow much faster, at around 11% per annum.

Top 5 Hotlist Import Origins

Rank

2013

2030

1

USA

USA

2

China

China

3

Mexico

Mexico

4

Japan

German

5

Germany

Japan

*Ranking among the 24 trade partners covered in the HSBC Trade Forecast

FOCUS ON ELECTRONICS

  • A shift is under way in Canada’s electronics industry. Canada is diversifying away from a narrow focus on communications equipment, a trend we expect to continue in coming years, underpinning electronics exports growth. Indeed, there has been a surge in patent applications in ICT industries according to the World Economic Forum. From a geographic perspective, we expect Canada to gain market share in emerging markets as these economies develop and their demand for electronic goods increases.
  • We expect electronics imports to rise in the long-term, driven by Canada’s knowledge-based economy, its highly-skilled workforce, and rising household spending and business investment as the economy growth mix diversifies.
  • Electronics exports are forecast to grow about 4% per annum on average over the period 2015-30. But this will be outpaced by growth in imports of electronics averaging more than 6% a year as domestic demand remains firm; as a result, there will be a widening trade deficit in electronics goods.
  • Canada is a member of the WTO’s Information Technology Agreement (ITA) and has removed tariffs on most of the electronics products covered by the agreement. An expansion of the agreement to cover an additional 200 products would reduce the average rate of duty on these goods applied in Canada from the current level of 6%.
  • Research cited by the Information Technology and Innovation Foundation shows that sectors of the economy that adopted ICT have seen a rise in labour productivity. We expect that businesses will increasingly adopt ICT where possible, contributing positively to long-term growth prospects.

Trade in electronic goods

About the HSBC Trade Forecast – Modelled by Oxford Economics

Oxford Economics has tailored a unique service for HSBC which forecasts bilateral trade in goods, based on HSBC’s own analysis and forecasts of the world economy. A top-down approach is employed, with Oxford Economics’ suite of models used to ensure consistency between HSBC’s forecasts for economic growth and exchange rates in key countries and the more granular projections for bilateral trade flows presented here.

Oxford Economics employs a global modelling framework, with headline bilateral trade forecasts constructed as a function of final demand in the destination market and the exporter’s competitiveness (as measured by relative unit labour costs). Exports, imports and trade balances are identified, with both historical estimates and forecasts for the periods 2015-20 and 2021-30.

These headline bilateral trade forecasts are also disaggregated by sector, using Oxford Economics’ Industry forecasts to inform future production trends. Sectors are classified according to the UN’s Standard International Trade Classifications (SITC) system at the two-digit level and grouped into 30 sector headings.

Oxford Economics produces a global report for HSBC, as well as country specific reports on the following 23 countries: Hong Kong, China, Australia, Indonesia, Malaysia, India, Singapore, Vietnam, Bangladesh, Canada, USA, Brazil, Mexico, Argentina, UK, France, Turkey, Germany, Poland, Ireland, UAE, Saudi Arabia, and Egypt. The analysis also includes trade with Japan and Korea for a total sample of 25 key trading nations.

All trade flows data are reported in nominal US-dollar value terms (using market exchange rates) unless otherwise specified. This means that fluctuations in a country’s terms-of-trade due to relative price and exchange rate effects are reflected in the data.

Sector Focus – Methodology 
This report also includes a special section on the electronics industry. Based on the same underlying forecasts used for the existing analysis of trends in bilateral trade flows, the report examines how exports/imports of these products are expected to evolve over time. The definition used in the report for the electronics sector is below:

  • SITC 75 – Office machines and automatic data-processing machines 
  • SITC 76 – Telecommunications equipment 
  • SITC 77 – Electrical machinery 
  • SITC 87 – Professional, scientific and controlling instruments 
  • SITC 88 – Photographic apparatus, equipment and supplies and optical goods

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