Industry Issues: Harper gov’t needs deft hand, political will
April 1, 2006
The Canadian economy is in the midst of a transition to new economic realities. High energy prices are pushing up the value of energy exports to the U.S. This is exaggerating the overall trade numbers...
The Canadian economy is in the midst of a transition to new economic realities. High energy prices are pushing up the value of energy exports to the U.S. This is exaggerating the overall trade numbers, sending the Canadian dollar skyrocketing and dampening exports of manufactured goods.
According to the Bank of Canada, the Canadian economy is performing well – at least within expectations. With continued economic expansion in the United States, further growth in Canadian domestic demand and exports is anticipated. The trade surplus is expected to narrow but will only “exert a small drag on growth in 2006 and 2007.” Annual GDP growth in 2006 is forecast at a healthy 3.1 per cent, which the Bank says will keep the economy “close to its production capacity.”
A December 2005 Statistics Canada report said Canada’s merchandise trade hit a new peak that month despite a rising dollar. Imports increased (reflecting strong consumer demand and the loonie’s buying power). Canada’s trade surplus soared by almost $8 billion, still below the record surplus of January 2001. The trade surplus with the U.S. did hit a record; exports to the U.S. jumped almost four per cent. Statistics Canada attributed this performance, at least in part, to the “considerable resilience” of Canadian exporters. However, the Bank acknowledges its outlook could be at risk if the dollar continues to rise.
Statistics Canada also concedes that if energy exports are excluded, total exports would have grown by only half what they did. For example, exports of automotive products slipped 1.5 per cent in December, with passenger autos and chassis declining by just over four per cent. Exports of motor vehicle parts were reportedly up in December, but only after two months of decline. Overall, Statistics Canada reports that Canadian factories shed a record number of jobs in January 2006 – 33,000 in Ontario alone.
One of the levers the Bank of Canada has in moderating the value of the Canadian dollar is through influencing short term interest rates. However, rather than lower or maintain rates, the Bank has raised its bellwether overnight rate by a quarter point in each of the last four fixed announcement dates. Still, by historical standards, short term interest rates in Canada are relatively low and have been allowed to fall below comparable U.S. rates by 90 to 100 basis points.
Some argue Canadians paid a price to bring our government’s previously bloated fiscal imbalance in line and that we should not throw our prudence out the window now and risk re-inflation by lowering interest rates.
Others argue that inflation is no longer the bogeyman it used to be; that the risks of re-inflation are minimal. (In fact, it was not too long ago some economists were worried about the prospects of deflation.) While inflation has been more volatile lately, reflecting oil prices, the Bank expects inflation to moderate towards its two per cent target over the next year. They say Canada is no longer in a monetary and fiscal straightjacket. Canada is the only G-8 country to have a balanced budget. Wasn’t that supposed to create additional monetary elbow room for the Bank of Canada to reduce rates and cause an orderly depreciation in the value of the dollar?
On the fiscal side, the new federal Minister of Finance will be receiving lots of ideas for new spending and for tax reductions. He will have to be cautious, but the opportunity to reduce taxes and invest in infrastructure, to enhance the country’s competitiveness and productivity overall, should not be squandered.
Trucking is a derived demand industry and a good leading indicator of economic activity. Motor carriers can tell which direction economic activity is heading long before the economists crunch their numbers. Always a fragmented industry, what carriers see depends on where they operate, the industries they serve, the commodities they haul. The disjointedness that is evident in Canadian economic performance is also evident in trucking.
Carriers in B.C. are enjoying the growth associated with Asian trade and 2010 Olympic fever. Carriers serving the oil patch are going gangbusters. (Even so, some western carriers say the oil boom is generating strong demand for inbound business inputs and consumer goods but little outbound freight, creating traffic imbalances.) Moving east, carriers that serve customers in key manufacturing sectors like automotive manufacturing, paper products and furniture take a more cautious view.
The shortage of truck drivers, which is becoming more acute, ensures that capacity remains tight, even in sectors where activity is off a bit. This should prop up rates. Regardless, it is not the trucking industry’s job, nor is it within the industry’s ability, to subsidize manufacturers with lower freight rates. Carrier costs continue to rise and must be paid for.
Building a stronger, more balanced Canadian economy, requires a deft hand and political will. The new Government of Canada needs to face this reality early in its mandate.
– David Bradley is president of the Ontario Trucking Association and chief executive officer of the Canadian Trucking Alliance.