Exporters More Brave than Resilient

(Stephen Poloz — Export Development Canada)

Canada’s exporters were hit with the perfect storm in 2007. Yet the value of exports rose by more than 2% during the year, suggesting an unexpected degree of exporter resilience. EDC’s latest exporter survey shows, however, that exporter confidence wilted in the final weeks of the year.

EDC’s survey of 1,000 exporting companies shows that expectations have deteriorated markedly in the past six months. The Trade Confidence Index fell from 72.9 to 67.4, which is even lower than in the wake of the terrorist attacks of 2001. The number of companies expecting export sales to decrease rose from 12% to 25%. Some 38% of companies expect trade opportunities to decline (up from 22%), and 30% expect global economic conditions to deteriorate (up from 20%).

The drop in confidence is across the board, touching all sectors of the economy and all regions of the country. The drop occurred regardless of the age of the company, and regardless of size. In fact, the older the firm, and the larger, the more pessimistic it is, according to the survey.

The rise of the Canadian dollar to well above U.S. dollar parity in the weeks just before the survey clearly played a big role in this outcome. Some respondents expressed disbelief that the dollar could remain so strong, but 41% were still expecting the dollar to appreciate further. Although this was down from 52% six months earlier, only 23% were forecasting that the dollar would decline – up from 17% six months earlier, but still a small number.

Nor is the domestic economy offering much solace. The survey recorded very large drops in expectations for domestic economic conditions and domestic sales. Hiring intentions also moderated, although still only 11% of surveyed companies expect to actually cut staff.

There are some positive aspects to the report. First, although there was a large drop in confidence, it was still much smaller than the drop that occurred during the winter of 2000-01, when the global economy was flirting with recession. Second, although 25% of surveyed companies expect export sales to decline, 75% expect sales to rise or remain the same – down from 89%, but still a healthy level. Third, exporters perceive increased risk but almost entirely in the U.S. economy. Risk perceptions declined for Europe, Asia, Africa and South America.

EDC’s latest forecast for exports is broadly in line with exporter sentiment. An outright decline in both export volumes and export values is forecast for 2008, even if the U.S. economy skirts recession. Nevertheless, we expect solid growth in exports to emerging markets, which will moderate in the face of the U.S. slowdown but retain good momentum. Export strength will be seen in the agri-food, fertilizer, farm machinery, aerospace and other equipment sectors.

The bottom line? According to our models, exports should have been much weaker in 2007. What the additional colour from our survey suggests is that exports held up not because exporters were resilient, but because they were brave, choosing to protect their foreign customers from price increases. And, the outlook is for an even more challenging year in 2008.