IN BRIEF

  • Canadian firm's confidence about near term prospects for the economy has remained broadly unchanged from 2015H1 to 2015H2. On the trade front, our latest survey indicates Canadian businesses are downbeat about their prospects abroad, but this is based entirely on a gloomy view of global demand excluding the US.
  • The US is expected to remain Canada’s most important export market into the long term. However, Canada’s presence in emerging markets, particularly Asia, is expected to grow over time.
  • Outside of energy exports, which will weaken as global markets rebalance, we do not expect much change in the mix of export goods. Canada will remain a large exporter of industrial machinery and transport equipment, fuelled by demand in advanced economies but also by emerging markets, where demand for manufactured goods is set to grow substantially into the long-term.

Low commodity prices will weigh on Canada’s economy in the near- term. However, while there are concerns regarding the near term trajectory of the global economy, several cyclical factors, among them upbeat US prospects, a weak Canadian dollar and low interest rates, will bolster exports into the medium term and will help mitigate the impact of falling activity in the energy sector. Canadian domestic demand, particularly consumption, will help offset the energy drag in the near term but there are concerns regarding its ability to underpin growth in coming years.

SHORT-TERM SNAPSHOT

HSBC Trade Confidence Score – Canadian businesses are more upbeat about the domestic economic outlook relative to 2015H1. Respondents have grown more confident about the domestic economy since our last survey, with 35% of respondents expecting the domestic economy to positively affect their business in the next six months. Respondents were also more upbeat over the outlook for volumes of business and trade over the next six months.

Trade Confidence Score

  • However, there is noticeable divergence between trade prospects with the US and other countries. For one, 50% of respondents believed the global economy would overall negatively affect their business in the next six months, up from 20% in H1. Second, the proportion of Canadian firms trading with Asia has fallen from nearly 60% six months ago to just above 44% in our latest survey. Lastly, with the share of respondents expecting the outlook for global economy to diminish in the next six months nearly double over the same time period to 41%. Conversely, the outlook on the US was fairly upbeat; two-thirds of respondents saw North America as the best opportunity for business growth. Given the upbeat outlook on trade volumes, respondents believe that solid economic activity in the US will overshadow any negative effects of the recent downturn in emerging market.
  • Commodity price volatility, and subsequent exchange rate volatility, are deemed the most important financial risks to business. Cost cutting and negotiating better payment terms with suppliers are among the most common means that respondents expect to use to mitigate their impact. Businesses’ top priority is to improve customer satisfaction and productivity (the latter of which has been an economic dilemma for some time). Given the dimmer global outlook, firms see slightly less need for trade finance in the next six months.

LONG-TERM OUTLOOK

Economic Outlook – Low oil prices will weigh heavily on the Canadian economy in the coming years. Forward oil prices are below where they were earlier this year and thus we expect energy sector investment and employment to drag on overall growth. Our downbeat view is supported by the fact that the glut in oil supply markets is unlikely to be used up and that the US (to which almost the entirety of Canada’s energy exports are shipped) will likely continue replacing foreign energy with domestic sources. After the boost from higher oil prices in recent years, low oil prices will drag on overall export values and Canada’s terms of trade.

However, rising non-energy exports should help lead the economy out of technical recession. The Canadian dollar will likely remain cheap on a historical basis versus the US dollar, boosting Canadian competitiveness, particularly manufacturers. Solid US prospects on the back of strengthening fundamentals will deliver an additional boost from Canada’s most important export market. Growing market share in Asia and new trade agreements, including the Trans Pacific Partnership (TPP) will raise Canada’s exports and open up access to new markets. However, high unit labour costs relative to the US (Canada’s most important export market) will provide some drag.

Overall, we forecast real GDP growth to accelerate in the near term from 1.0% in 2015 to 2.3% by 2017. Consumption will be a main driver of a rebound in real GDP growth in the very near term, but in the long term, slowing job creation, increased global uncertainty, and high household indebtedness mean consumer spending is likely to slow into the long term. The overextension of household balance sheets, coupled with sign of overheating in the housing sector, is also expected to lead to weaker residential investment in the years ahead.

Export Corridors to watch – The dramatic ongoing shift in oil markets will cause petroleum product exports to fall in importance for overall export performance in the coming years. Petroleum products, which were the most important export sector in 2014, are expected to drop to be the second-most important export sector in the decade to 2030, and contribute 13% to total export growth in the decade to 2030. Transport equipment is expected to rise over this time and become Canada’s most important export sector, forecasted to contribute 18% to total export growth from 2021-2030. Aside from this, we do not expect much change in Canada’s industrial specialisations. Industrial machinery is expected to contribute 12% to total export growth in the decade to 2030 while animal and plant materials are expected to retain their position and add 5% over the same time.

Sector contribution to increase in exports

  • We do not expect much shift in the composition of Canada’s export markets in the decade to come. Given deep-seated economic and financial linkages, the US is expected to remain Canada’s most important overseas market (amongst the 24 trade partners in the HSBC Trade Forecast) but the already high degree of interconnectedness means per annum average growth is forecasted at rise a subdued 6% in decade to 2030.
  • Much faster export growth is expected in other markets, particularly Asia. We expect exports to China will accelerate as the economy shifts to be more driven by domestic demand and see export growth accelerating to average 12% in the decade to 2030. Along the same lines, Canada is also expected to grow its market share in Indonesia, with the pace of annual export growth set to rise starkly to 10% in the decade to 2030. Recently announced trade agreements, including the TPP, should open up access to new overseas markets and support export growth in coming decades.

Top 5 Hotlist Export Destinations

Rank

2014

2030

1

USA

USA

2

China

China

3

UK

UK

4

Japan

Japan

5

Mexico

Mexico

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

Import Corridors to watch – We do not expect any substantive change in the growth mix of Canada’s important import sectors in next decades. Industrial machinery to retain its position as Canada’s most important import sector, driven by Canadian businesses’ need to source equipment from abroad. Transport equipment will also retain its position as Canada’s second most important import sector, seen to contribute about 20% to total import growth in the decade to 2030, underpinned in part by rising consumer spending on automobiles. Looking at the other sectors, growth dynamics will see little discernible shifts. The only noteworthy change is that ICT equipment is expected to rise in importance, with its contribution to imports set to usurp chemicals and contribute 6% to import growth per annum from 2021-2030. This adjustment will be driven by driven by rising household spending and business investment and the needs of Canada’s highly-skilled workforce.

Sector contribution to increase in imports

  • Given the extensive linkages between the two countries, Canada is expected to continue sourcing its imports mostly from the US (amongst the 24 trade partners in the HSBC Trade Forecast). Advanced economies are expected to remain the major source of imports, but emerging markets will over time grow their foot hold in the Canadian market place. Specifically, import growth from Bangladesh and Vietnam is expected to accelerate and average 11% from both countries in the decade to 2030, driven in party by their lost cost advantage.
  • TPP will help member countries retain their market share in Canada; that it is a living agreement means that current non-member countries – such as China – may be able to gain access to Canadian markets, if they agree to the tenets of the deal. Lastly, South Korea is expected to replace Japan as Canada’s fifth most important source of imports, driven by rising demand for its ICT equipment and the free trade agreement that was implemented earlier this year.

Top 5 Hotlist Import Origins

Rank

2014

2030

1

USA

USA

2

China

China

3

Mexico

Mexico

4

Germany

Germany

5

Japan

Korea

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

DRIVERS OF RECOVERY

  • The near-term outlook for Canadian exports will be restrained by a soft outlook for energy exports. However, looking further out, rebounding global demand and the fading impact of lower oil prices should cause export growth to accelerate modestly.
  • Non-energy exports will support a recovery in overall exports. Proximity to the growing US market will be key in this respect. Canadian transport equipment exports will also lend support, contributing the same amount over the same time, as low gasoline prices and a solid outlook on US and Asian automobile sales will require greater activity among Canada’s automobile automobile-related manufacturers. Canada also stands to receive greater access to economies part of the recently announced TPP agreement, whose members represent 40% of global GDP.
  • A weak Canadian dollar should help foment an upturn in exports in coming years. Two of the driving factors that have caused the currency to depreciate in recent months – lower oil prices and easy monetary policy by the Bank of Canada – will remain steadfast and reinforce downward pressure on the currency. Expectations of Fed rate lift-off in the coming months, well ahead of any tightening by the Bank of Canada, will spur upward pressure on the US dollar, keeping the Canadian dollar low and reinforcing the competitiveness of Canada’s exports in its most important export market.
  • Canada will find itself lucky that the US economy – its most important export market – has remained fairly isolated from the recent global economic turmoil. As such, upbeat US domestic demand prospects will support a rebound in Canadian exports in the near term. However, global demand is expected to regain its lustre after current headwinds pass and support faster export growth in the outer years.

Exports by sector

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 21 countries: Hong Kong, China, Australia, Indonesia, Malaysia, India, Singapore, Vietnam, Bangladesh, Canada, USA, Mexico, Argentina, UK, France, 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.

This document is issued by HSBC Bank plc. It is not intended as an offer or solicitation for business to anyone in any jurisdiction. It is not intended for distribution to anyone located in or resident in jurisdictions which restrict the distribution of this document. It shall not be copied, reproduced, transmitted or further distributed by any recipient. The information contained in this document is of a general nature only. It is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. The views and opinions expressed by contributors are their own and not necessarily those of HSBC Bank plc. Under no circumstances will HSBC Bank plc or the contributors be liable for any loss caused by reliance on any opinion or statement made in this document.