Canadian Trade Tumbles

(Export Development Canada – Peter G. Hall)

For world GDP, the fourth quarter of 2008 was ugly. Canada was no exception, as our economy fell into recession, shrinking by an annualized 3.4% in the quarter. But Canada suffered a lot less than most other large economies – strange, given our greater dependence on international trade. Has our resilient domestic economy helped us to sidestep the worst of the global gloom?

Far from it. Domestic demand shrunk by an annualized 5.1% in the quarter, while net trade flows actually boosted growth – substantially. How? Exports fell, but at the same time, imports were down by even more. Absent the effect of lower imports, Canada’s GDP would have contracted by about 5.8% in the final three months of 2008, much closer to the US and pan-European declines.

Many may be assuaged by the arithmetic magic, but the overall story is not good. While shrinking imports might shore up the bottom line temporarily, they speak volumes about the economy’s ills. Consumers import heavily, and their spending was down sharply in the quarter. At the same time, business spending on equipment – most of which is imported – plunged. And globalisation of our production has in 20 years ramped up the import content of exports, so lower imports are actually highlighting the pain that exporters are currently feeling. And don’t forget, imports create jobs too. Read more here.