January 24, 2005

EDC's Trade Confidence Index has declined

Exporter confidence is flagging

By Stephen Poloz

(DCN Special)

The confidence of Canadian exporters in the future has taken a beating in the last six months, according to the latest survey of 1,000 exporting companies.

EDC’s Trade Confidence Index (TCI) has declined significantly to 70.6, from 75.0 reported in July 2004.

This marks the lowest reading for exporter confidence since the fall of 2001, in the aftermath of the terrorist attacks on September 11 that year, when the TCI registered 67.7.

The TCI has a good record of correlation with world economic growth, so its fluctuations are not to be ignored. The premise behind its construction is that exporting companies know when business is picking up or slowing down when the orders are placed, often six to 12 months before the sales themselves. The index rebounded sharply in the six months after 9/11, to reach a peak of 80.3, in line with the trajectory of global economic growth.

Likewise, it then eased back during 2002 and into early 2003 and regathered its strength during late 2003 and early 2004.

Now, it has retreated again.

It is tempting to attribute this drop in confidence entirely to the behaviour of the Canadian dollar, which was repeatedly cited as a concern by survey respondents. Most of the interviews were conducted in November, when the dollar was in the 84 to 85 cent (U.S.) range, and expectations of higher values for the currency were running rampant. Indeed, fully 50 per cent of companies surveyed believed the Canadian dollar would appreciate further in the next six months, more than double the reading in the last survey. Since that time, the dollar has backed off a little, to around 81 to 82 cents (U.S.), so it may be that confidence readings would be somewhat higher today.

The problem is that all five sub-components of the TCI have retreated together. True, the biggest drops are in the number of companies expecting global conditions to improve or foreign sales to increase. But readings on future trade opportunities and domestic economic conditions and sales have also retreated, albeit less so. It is unlikely that all of this can be laid at the dollar’s door.

Nonetheless, the TCI is a survey of sentiment, not a quantifiable measure.

EDC’s forecast is for a noticeable moderation in global economic growth, from 4.5 per cent in 2004 to 3.9 per cent in 2005, with most of the moderation coming from China and the U.S.

Early signs of this moderation have been appearing for several months and are undoubtedly affecting exporter sentiment.

Qualitatively, therefore, the drop in confidence is consistent with EDC’s forecast, and we have not downgraded our outlook further in response to the survey.

We were already expecting headline growth in exports to ease from 9.0 per cent in 2004 to 1.0 per cent in 2005; behind these figures, export volume growth will ease from 8.0 per cent to 3.0 per cent in 2005 — uninspiring, but respectable.

We believe the dollar is holding above 80 cents (U.S.) mainly because of persistent strength in oil prices — and a retreat in oil into the thirties will give the U.S. dollar a boost and bring the loonie back into the high seventies.

The bottom line? In the past year, Canadian exporters have experienced the first growth in export sales since 2000. Assuming the dollar eases back, and the world remains solid, growth should continue into 2005, albeit at a slower pace — but export companies are having their doubts.

Stephen Poloz is senior vice-president, chief economist of Export Development Canada. The views expressed here are those of the author, and not necessarily of Export Development Canada.

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