Hanging in the balance

THE BANK OF CANADA ENDED 2013 ONACLIFF-HANGER NOTE, LEAVING MONETARY POLICY ANALYSTS WONDERING IF OUR NATION’S SLUGGISH ECONOMIC RECOVERY AND BELOW-TARGET INFLATION RATE WILL LEAD TO AN INTEREST RATE CUT THIS YEAR. EITHER WAY, CANADIAN EXPORTERS SHOULD BE

As it stands, there is a clear surplus of expectations for Canada to return to a positive external merchandise monthly trade balance. According to Trading Economics, the nation’s trade balance averaged $1.7 billion from 1971 until 2013, hitting an all-time high of $8.5 billion in January of 2001 and a record low of -$ 2.9 billion in July 2012.

News that a surprise $75- million surplus in October had put an end to a 22- month-long string of deficits fuelled by a strong currency raised hopes that the economy was increasingly being driven by trade instead of domestic demand, which would have been a good sign, especially with Canada’s high level of consumer debt. But a November stall in exports that led to a $940- million deficit, along with a revision of October’s results into negative territory, has chilled the optimism.

After improving earlier in the year, Canadian export growth appears to be at a standstill. “We now expect trade to be a drag on growth in the fourth quarter, which puts downside risk to our GDP forecast of 2.3%, and reaffirms the Bank of Canada’s dovish bias,” TDBank economist Leslie Preston said in a commentary.

Nevertheless, with Canada’s central bankers now appearing to sing a different monetary policy tune than their American cousins, the Canadian dollar should help support trade. The loonie finished the year trading around US93¢ and currency experts expect US90¢ or lower to be the new normal for much of this year.

The benefits of a weaker currency will be limited by hedges put in place to protect companies from market swings. But, generally, the loonie’s decline against the greenback will support exports and real GDP growth in the near term, because it makes Canadian goods cheaper for foreign consumers. The Conference Board of Canada’s fall outlook forecasted economic growth of 2.4% in 2014 and 2.6% in 2015, a significant improvement over growth estimates for last year.

A betting person, of course, might expect better results. After all, the Bank of Canada rocked markets by dramatically failing to include any mention of eventual rate increases when announcing its last decision in 2013 to hold the nation’s key interest rate at 1%. And there is some speculation that central bank officials are happy to look more negative than necessary since a dovish monetary policy stance clips the loonie’s wings and helps exports.