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Why your best customers are feeling hard pressed

For the many of you who rely on hauls to the US for a good chunk of your business, the latest results from Export Development Canada's (EDC) trade survey are reason for concern....

For the many of you who rely on hauls to the US for a good chunk of your business, the latest results from Export Development Canada’s (EDC) trade survey are reason for concern.

EDC surveys about 1,000 Canadian exporting companies twice per year, in late spring and late fall. The survey asks companies about their outlook for the global and domestic economy, for exchange rates and for hiring, among other things. Several of the responses are combined into a single statistic, known as the Trade Confidence Index, or TCI.

The latest readings show that trade confidence has faltered, with the TCI dropping to 71.7 from 73.7 six months earlier. The main reason for the drop is a shift in perceptions of global economic conditions. Six months earlier, 18% of respondents said that global economic conditions would get worse, while 22% expected them to improve. This time, 24% expect conditions to worsen, and only 14% expect an improvement. In addition, there has been a noticeable increase in the percentage of companies expecting domestic economic conditions to deteriorate.

Most export sectors showed weaker trade confidence, with the exception of the energy sector. The decline in the TCI would have been much larger without the surge in energy sector confidence. Regionally, the largest drop in trade confidence was in Ontario.

The sky is not falling – 47% of companies are still expecting export sales to increase, and only 11% are expecting a decline. Nevertheless, exporters foresee slower global growth, especially in the US, which consumes a good 85% of our exports but whose housing market boom is getting long in the tooth with the ratio of median mortgage payments to median income – a good indicator of affordability – at its highest level since 1989. A bursting of the housing bubble could create a considerable loss in consumer confidence and in turn that would have a considerable impact on the economy of our largest trading partner. Half of the American private sector jobs created since 2001 have been in housing-related industries and a large chunk of the growth in consumer spending has been financed by borrowing against capital gains on homes. As some economists have said of late, Americans are using their homes as Instant Teller machines and if their homes are suddenly worth less than they thought they were, it could make for painful consequences. The experience of similar housing bubbles in Britain and Australia have already shown that even a leveling off of housing prices can trigger a slowdown in consumer spending.

With the moderation in the world economy resulting in lower non-energy commodity pricing, it might be hoped that carriers will at least benefit from a drop in the Canadian dollar. For those being paid in US dollars by US customers the shocking rise of the Canadian dollar against the American greenback has been tough to swallow, particularly, as our Transportation Media Research shows, few have been successful in pushing through currency surcharges. Yet a lower dollar is not likely to happen in 2006.

As other EDC research indicates, the extent to which the Canadian dollar has become a petro-currency is considerable. Oil prices have more than tripled since 2001, a rise similar to the price shocks of 1973-74, 1978-80 and 1989-90, all of which, it should be noted, were followed by worldwide recession.

EDC’s statistical model shows that a rise in the price of oil of $10 results in an appreciation of the dollar of three cents. So to get the dollar back below 80 cents means getting oil prices back to around $50, an unlikely scenario considering the unusually tight production and refinery capacity. And, of course, higher oil prices will push the loonie further into the 80s.

Exporters themselves expect a stronger Canadian dollar – 34% of respondents to the EDC trade survey said they expected an appreciation, up from only 21% six months earlier. More importantly, when asked how they are responding to the strong dollar, fewer companies are now saying they will simply ride it out.

Stuck between a high Canadian dollar making their products less attractive in their main market at a time of moderated sales volumes and high energy prices, your customers are saying that they will cut costs and root out inefficiencies in order to restore their profit margins. And that could mean, among other things, more difficult bargaining on transportation rates.

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