Weak U.S. Investment Hinders Canada’s Non-Energy Exports, Reports Reuters

By Fergal Smith

TORONTO – Economists indicate that sluggish business investment in the U.S. has hindered the long-anticipated growth of Canada’s non-energy exports, while a weaker Canadian dollar has not bolstered exports as much as initially hoped.

Since mid-2014, when oil prices—a key Canadian export—began to decline, the Canadian dollar has depreciated by 18 percent against the U.S. dollar.

Canada requires an increase in non-energy exports, spanning from consumer goods to industrial machinery, to mitigate the effects of the oil price slump and lessen the burden on Canadian consumers to sustain economic growth. Boosting exports could also help reduce dependency on an overheated housing market.

Although the weakened currency has benefited exports to some extent, it has recently appreciated against other currencies, such as the Mexican peso, which has limited the overall impact. Nathan Janzen, a senior economist at Royal Bank of Canada, noted that due to a larger depreciation in Mexico, a greater number of U.S. imports are now directed to Mexico instead of Canada.

In the same timeframe since mid-2014, the Mexican peso has experienced a 29 percent decline in value against the U.S. dollar.

Nick Exarhos, an economist at CIBC Capital Markets, pointed out the consequences of losing significant manufacturing capacity, stating that Canada currently has fewer exporters available to take advantage of a lower dollar.

The Bank of Canada has been relying on a resurgence in non-energy exports for economic growth projections. However, recent trade data from June showed a decline in these shipments.

Michael Dolega, a senior economist at TD Bank Group, highlighted that the current weak link lies within sectors that are predominantly affected by business investment, specifically areas such as machinery, aerospace, railroads, and non-automotive transportation equipment.

U.S. business spending on equipment has contracted for three consecutive quarters as low oil prices have pressured energy sector profits, compelling companies to reduce capital expenditures, coupled with an inventory drawdown that affected growth.

Exarhos added that because U.S. consumers of Canadian exports are saturated with inventories, there is currently limited demand for additional imports from Canada.

Nevertheless, economists anticipate an improvement in Canada’s non-energy exports.

"Our forecasts assume that U.S. business investment will begin to recover in the latter half of this year as disruptions in the oil and gas sector subside and domestic demand continues to rise, necessitating an increase in capacity," stated RBC’s Janzen.