The outlook for Canada’s economy continues to improve as world trade and the USA’s growth recover. A key driver of activity will be rising exports, with the country well-placed to take advantage of growing demand for commodities in emerging markets. The majority of firms expect conditions to remain broadly unchanged over the next six months.
- In the short-term, trade volumes are expected to remain stable, with the USA still seen as the most promising region for trade.
- The key sectors driving Canada’s export growth in the longer-term are petroleum products, transport equipment and industrial machinery.
- While the USA will remain a crucial trade partner, China will play an increasingly important role over time.
An improved outlook for the USA’s growth in the second half of 2013 will help to support Canada’s exports. This will counteract weak commodity demand from emerging markets, as China and Latin America are Canada’s most important trade partners after the USA.
Equipping for growth
Why infrastructure is important
Infrastructure goods drive an economy’s productive capacity, and in Canada’s case, they are also an important contributor to current and projected trade volumes.
Canada is an important supplier of intermediate goods for infrastructure. Its exports of non-ferrous metals are expected to accelerate in the short run, driven partly by rising demand from China and Japan. China will maintain the fastest growth in the medium-term, but demand will also rise from other emerging markets in Asia.
Within investment equipment, growth in the demand for Canada’s ICT equipment exports will again be led in the short run by China, as well as Japan in the short run. Other emerging markets (especially Poland, Saudi Arabia, Hong Kong, India, and Vietnam) are expected to become increasingly important markets over time.
Strong export growth will result in Canada rising one place to 9th by 2030 in our ranking of countries by intermediate goods for infrastructure trade.
“The investment countries are making in infrastructure is phenomenal and provides a huge opportunity for businesses looking to grow and develop.
Rising middle classes across Asia’s rapidly emerging markets will drive significant infrastructure demand in the region. As China looks to scale the value chain in terms of the goods it manufactures, there is a strong opportunity for developed economies to supply sophisticated investment equipment to the country’s producers.
We expect infrastructure-related goods to increase their share of rising global trade, providing strong opportunities across both developed and emerging economies for exporters and importers of those goods and the merchandise that can be manufactured as a result.”
James Emmett, HSBC Global Head of Trade and Receivables Finance
Half of business leaders believe that Canada’s trade volumes will increase in the next six months, with 40% believing they will remain constant. The majority of firms expect no short-run changes in trade conditions.
HSBC Trade Confidence Index
The HSBC Trade Confidence Index has increased modestly from 110 to 111 in H1 2013.
The main factor driving an increase in trade volumes, according to respondents, will be rising demand in key markets. A more general increase in global demand is also expected.
On balance, more TCI respondents believe that government policy will have a favourable effect on trade than otherwise.
Cross border business
The USA remains Canada’s most important trading partner, with 50% of respondents highlighting the USA as their most promising export market.
Exchange rate movements were cited by 52% of respondents as the main barrier to trade in the short term.
A high proportion (39%) also thought that the costs of essential services such as shipping, logistics and storage would have a detrimental impact on trade.
Corridors of choice
- The HSBC Trade Confidence Index score remains below the high of 115 seen in H1 2012, indicating that the short run outlook remains subdued.
- Nevertheless, investment equipment and goods for infrastructure are forecast to grow relatively strongly, contributing towards a growing share of total trade.
- Half of surveyed business leaders believe that the USA will be Canada’s most promising trade partner in the next six months. Greater China is cited by 15% and Latin America by 9%.
Opportunities for business
Overall, nearly half of the businesses surveyed expect the world economy to grow slightly in the near future. This supports the expectation that Canada’s merchandise exports will grow by around 1.5% this year, before accelerating to more than 4% in 2014 and 2015.
Canada’s geographical location provides firms with easy access to the Atlantic, Pacific and North America. Accelerating demand in the USA, the country’s most important market, will support Canada’s trade outlook. And Canada’s natural resource endowment will make it an attractive trading partner for China and other emerging markets.
Corridors to watch
The United States is projected to remain Canada’s primary export market in 2030, with China expected to become the second largest.
Although imports will continue to be driven by industrial machinery and transport equipment, their contribution to import growth is expected to decline from 30% to 20% in the long-run.
Growth in regional export flows in the long run is led by Asia (excluding Japan), with exports to the region expected to rise by 12% pa. Latin America, Middle East and North Africa, and Sub-Saharan Africa are all expected to grow at just under 9% pa.
Focus on infrastructure
- Infrastructure goods are expected to increase as a share of exports from 22% to 32% by 2030.
- Sectors driving the increase are transport equipment, industrial machinery and non-ferrous metals.
- Infrastructure goods are also expected to grow as a proportion of imports, increasing their share from 38% to 43% by 2030.
- Nearly a third of Canada’s imports in 2030 will be investment equipment, driven by transport equipment and industrial machinery.
Canada has an attractive long run trade outlook. The most active sectors are expected to be investment equipment and goods for infrastructure, with each forecast to contribute an increasing share of trade volumes. The USA is expected to remain Canada’s largest trade partner, but Asian markets, and in particular China, will become increasingly important over time.
About the HSBC Global Connections Report — 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, plus regional reports and 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.
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 2013 15, 2016 20 and 2021 30.
The model looks at two-digit classifications from the COMTRADE database, grouped into a set of thirty headings. The sector data has been tracked by country, to give an insight into the primary drivers of trade between the 25 countries and territories in the sample. The sector data has been calculated to show growth as a percentage of the overall contribution to growth, to ensure that the model highlights the sectors which are representing the biggest drivers of growth. More information about the sector modelling can be found on: www.globalconnections.hsbc.com
Oxford Economics formerly Oxford Economic Forecasting was founded in 1981 to provide independent forecasting and analysis, tailored to the needs of economists and planners in government and business. It is now one of the world’s leading providers of economic analysis, advice and models, with over 500 clients. Oxford Economics commands a high degree of professional and technical expertise, both in its own staff of over 70 professionals based in Oxford, London, Belfast, Paris, UAE, Singapore, Philadelphia and New York, and through its close links with Oxford University and a range of partner institutions in Europe and the USA.
About the HSBC Trade Confidence Index:
The HSBC Trade Confidence Index is conducted by TNS on behalf of HSBC in a total of 20 markets, and is the largest trade confidence survey globally. The current survey comprises six-month views of 5,800 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 May June 2013 and gauges sentiment and expectations on trade activity and business growth in the next six months.
Equipping for growth Methodology:
This report looks at the key industry sectors that contribute to an economy’s productive capacity. This will include not only trade in the intermediate goods required for infrastructure projects, but also trade in the investment equipment required by businesses to boost production.
It collects key investment-related sub-sectors into two groups, defined as “intermediate goods for infrastructure” and “investment equipment”. As the sectoral trade forecasts are based on the UN’s Standard International Trade Classifications at the two-digit level, this does present some issues in accurately defining the sub-sectors that contribute to investment, due to broad sectoral definitions.
Intermediate goods for infrastructure:
66 Non-metallic mineral manufactures
67 Iron and steel
68 Non-ferrous metals
69 Manufactures of metals
76 Telecoms equipment
81 Prefabricated buildings
79 Other transport equipment
71 Power-generating machinery and equipment
72 Machinery specialised for particular industries
73 Metalworking machinery
74 General industrial machinery and equipment
75 Office machines and automatic data-processing machines
77 Electrical machinery, apparatus and appliances
87 Professional and scientific instruments
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 two aggregates are expected to evolve over time. The import forecasts for these aggregates will be linked to the underlying investment requirements of the economy, while the export forecasts will be linked to the economy’s ability to produce the investment goods required by other nations.
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.