Canada Trade Forecast Report - HSBC Global Connections

March 2014


Canada’s economy is forecast to gain momentum this year and, more importantly, the composition of growth is expected to rebalance and broaden. Stronger business confidence and an upturn in external demand, particularly from the US, will support the much needed rotation from domestic demand toward exports and business investment.

  • The number of firms expecting trade volumes to rise in six months has reached its highest level since the Trade Confidence Index (TCI) survey began in H1 2010.
  • Canada’s Research & Development (R&D) intensity is the second lowest in the G7. This gives Canada ample room to raise its performance on the innovation front and use the high-tech sector to boost its economy.
  • The US will remain Canada’s dominant trade partner, but Asia will increase in importance over the medium term.
Top five export destinations*
Rank 2012 2030
1 USA USA
2 China China
3 UK UK
4 Japan Japan
5 Mexico Mexico

*The table considers goods exports between the 25 countries in the sample.

Canada’s export performance has recently faltered as a result of weak external demand and a declining export share. The first will be offset by stronger growth in the US. The second will be more challenging to overcome, given its source in Canada’s muted productivity growth and geographic distance from fast-growing emerging markets.

Equipping for growth

Spotlight: Technology

With emerging markets targeting R&D investment to scale the value chain in the high-tech sector, this illustrates the need for developed economies to invest in innovation to remain competitive.

Why technology is important

Technology advances are essential for maintaining and enhancing standards of living, promoting business investment and supporting economic developments. Weaker than average productivity growth is a challenge facing Canada’s economy. However, technological advance can raise productivity by improving the efficiency of production processes or by introducing more valuable goods.

Trade in technology goods for Canada (2013-30) - Growth (% year)

“Whilst we are seeing a contrasting short-term trade outlook, the longer-term trend for emerging markets remains one of growth and businesses need to consider now how best to capitalise on long-term trade opportunities. An important element of this is investing in research and development, which will allow emerging markets to scale the global value chain. Importantly, developed economies need to enhance their research and development spend to remain competitive.”

James Emmett, HSBC Global Head of Trade and Receivables Finance

Key findings

  • Canada’s innovation levels are under some pressure because business R&D intensity is only about half of that in the US, and the volume of tax credits for innovation is a third of that in the US.
  • Growth in Canada’s high-tech sector entered a steep downward trend after the tech bubble in 2000. Institutional bottlenecks, a slowdown in private firms listing on the stock exchange, and foreign acquisitions of small promising firms have all contributed to the decline.
  • Financing of high-tech investment also remains constrained as investors flock to the mining and resources sector. This may begin to change as commodity prices moderate.
  • Despite this environment, the S&P/TSX Information technology index has shown one of the best performances across index groups since 2013, suggesting potentially significant gains if Canada can revive its high-tech sector.

Short-term snapshot

Trade volumes are seen rising in the short run by 58% of survey respondents, up from 50% just six months ago. Firm level factors will drive this improvement, with a spike in the number of firms attributing the improving outlook to strategies focusing on increased business (from 3% to 14%) and product upgrades (from 3% to 9%).

HSBC Trade Confidence Index (TCI)

The TCI rose to 115, above its historical average of 111, while the number of firms expecting an increase in trade volume reached its highest level since the survey began in H1 2010. At the industry level, almost 60% of the wholesale/retail sector and 55% of the manufacturing sector expect greater trade volumes.

Cross border business

Survey respondents expect geographically broad based increases in trade volumes. The US is viewed as the most promising region for trade in the short term, with over 50% of respondents citing it as presenting the best business opportunities.

Regional export flows - Growth (% year)

Corridors of choice

  • The US is strategically important for Canada’s trade position, identified as a trade partner by over 95% of survey respondents. Asia, and particularly China, is second in importance.
  • The CAD is at its weakest level in three years. Unfavourable exchange rate conditions were cited by 65% of wholesale/retail firms as a constraint on business, reflecting the higher cost of imports.
  • Of those exporting firms who anticipated weaker volumes in the short-term, there was an even split between those citing reduced demand in key markets and those citing customer movement towards localised sourcing.

Opportunities for business

Stronger growth in the US will be a key driver for Canada’s trade outlook in the near term. The TCI’s latest survey results suggest that firms are gearing up to take advantage of this, given their reported emphasis on export business expansion and the introduction of new or improved goods.

Long-term outlook

Stronger growth in the US and improving prospects in Europe should lift Canada’s exports in the immediate years. In the medium term, Canada’s exposure to fast growing emerging markets is more limited than that of the US. Canada can offset this geographic constraint by increasing its integration in global supply chains.

Corridors to watch

Canada’s main trading partners have historically been the slower growing advanced economies, Europe and the US. The recent weakening of Canada’s world export share has lead firms to begin diversifying their trade routes toward emerging markets.

The fastest growing markets for Canadian exports are expected to be China, India and Indonesia. Double digit export growth to these countries is expected out to 2030.

At the sector level, petroleum products, transport equipment, and industrial machinery will be the main contributors to export growth both in the short and medium run. On the import side, industrial machinery, transport equipment, and Information Communication Technology (ICT) equipment are expected to be the most critical to Canada.

Canada’s projected sector contribution increase in merchandise exports

Focus on technology

  • If Canada can revive its tech sector, its educated labour force and stable business environment make it well positioned to gain market share in exporting high-tech goods, particularly if Canadian firms can integrate into US supply chains to emerging markets.
  • High-tech exports are set to accelerate from 1% a year on average over the past decade to 6% a year in the medium term.
  • Canada will also import greater volumes of high-tech goods, with growth forecast to accelerate from 5% a year in the past decade to 7% a year in the medium term. This will allow Canada to benefit from foreign R&D advances.

Conclusion

Stronger growth in the US will support Canada’s trade position in the short run. Over the medium-term, Canada can make gains by diversifying from its dominant resources sector toward technology intensive goods. These gains will be even greater if Canada can embed itself in global supply chains to take advantage of the high-tech sectors in emerging markets.

About the HSBC Trade Forecast – Modelled by Oxford Economics

Oxford Economics has tailored a unique service for HSBC which forecasts bilateral trade for total exports/imports of goods, based on HSBC’s own analysis and forecasts of the world economy to generate a full bilateral set of trade flows for total imports and exports of goods, and balances between 180 pairs of countries. 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.

Oxford Economics employs a global modelling framework that ensures full consistency between all economies, in part driven by trade linkages. The forecasts take into account factors such as the rate of demand growth in the destination market and the exporter’s competitiveness. Exports, imports and trade balances are identified, with both historical estimates and forecasts for the periods 2014-16, 2017-20 and 2021-30. 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. More information about the sector modelling can be found on http://www.globalconnections.hsbc.com/

About the HSBC Trade Confidence Index:

The HSBC Trade Confidence Index is conducted by TNS on behalf of HSBC in a total of 23 markets, and is the largest trade confidence survey globally. The current survey comprises six- month views of 5,550 exporters, importers and traders from small and mid-market enterprises on: trade volume, buyer and supplier risks, the need for trade finance, access to trade finance and the impact of foreign exchange on their businesses. The fieldwork for the current survey was conducted between November – December 2013 and gauges sentiment and expectations on trade activity and business growth in the next six months.

Technology Focus – Methodology

This report focuses on how emerging markets are targeting R&D investment to scale the value chain in the high-tech sector, illustrating the need for developed economies to invest in innovation to remain competitive. For this analysis, we collected together four key high-tech sub-sectors into one group:

  • Office machines and automatic data-processing machines (SITC code 75)
  • Telecommunications equipment (SITC code 76).
  • Electrical machinery and appliances (SITC code 77)
  • Photographic apparatus and optical goods (SITC code 88)

Based on the same underlying forecasts used for the existing analysis of trends in bilateral trade flows, the report examines how exports/imports of this group of products are expected to evolve over time.

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