Canada’s export industries will probably continue to struggle to stay afloat thanks to the rising Canadian dollar, says TD Bank Financial Group.

“While stronger economic growth in the United States in the second half of the year will alleviate the pain, the full impact of the appreciation of the Canadian dollar is likely to ripple through Canada’s trade sector all the way through the remainder of 2003,” TD senior economist Marc Lévesque says in report today.

His comments followed the release of the report on Canada’s merchandise trade in which the country’s exports recorded a third consecutive decline in June with a hefty drop of 3.2%. That was enough to drive Canada’s merchandise trade surplus to $3.6 billion from $3.9 billion in May, its lowest reading since late 1999.

“The report left little doubt that Canada’s export sector is taking an all-out beating, pummeled by the vicious combination of a sharply stronger Canadian dollar, a still-queasy U.S. economy, and a flurry of other one-off blows – including the hit from Canada’s lone case of mad-cow disease,” Lévesque says.

He notes the drop in the trade surplus would have been even more pronounced had the plunge in exports not been accompanied by a 2.2% decline in the value of imports during the month – hardly comforting news, as it most likely reflects emerging weakness on the domestic economic front as well.

“And, just as significantly, the narrowing in the trade balance over the past few months is likely to send Canada’s current account balance towards the $10 billion mark (annualized) in the second quarter – also its lowest level since 1999.”

Mad-cow was not the only factor at play in Canada’s weak export performance, Lévesque says. The ban on Canada’s beef exports was significant in June’s tally, accounting for about one-third of the drop in shipments abroad during the month. But the decline was widespread across most sectors: exports of aircraft and parts recorded a dramatic 19.8% plunge during the month; the auto sector also fell, 2.6%; also hit hard, falling 4.6%, were forest products, the sector most vulnerable to the jump in the value of the loonie; and shipments of industrial goods and materials dipped by 2.6%.

Nor was the news from this morning’s heavily export-oriented manufacturing sector much more encouraging, Lévesque adds.

“Manufacturing shipments recorded a 0.5- per- cent decline in June, with mad-cow disease an important factor, but with weakness also showing up in autos, machinery and forest products – all in all, a fairly convincing reflection of the export data.

The 2% increase in new orders during the month was encouraging news, he says, “although unfilled orders – a more reliable gauge of future shipments – still posted a tenth consecutive loss of 1.3%. And, while manufacturing inventories declined, the inventories-to-shipments ratio remained at a high level, which points to cutbacks in output down the road.”

BMO Nesbitt Burns Inc. chief economist Sherry Cooper noted that manufacturing remains one of the weak spots in the Canadian economy, along with tourism.

Nesbitt says that it’s “critical” to note that the three-month drop in shipments was heavily influenced by falling export prices, directly related to the spring surge in the C$. “With U.S. demand on the mend and the loonie no longer on a one-way trip north, manufacturing activity may soon hit bottom,” Cooper says.

Economists said today’s news suggests the Bank of Canada will be pressured to cut rates further.

“All told, this keeps the odds of a Bank of Canada rate cut on September 3rd very much alive,” Lévesque says.
Adds Cooper: “June was a difficult month for Canadian trade. With some spillover into Q3, the Bank of Canada may need more convincing to forgo another rate cut in September.”