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Canada's State of Trade: Trade and Investment Update 2012
III. Canada’s Economic Performance
|Data: Department of Finance|
Source: Office of the Chief Economist, DFAIT
During 2011, Canada’s economic recovery continued, despite a more challenging global environment which saw output in the United States and the EU grow by only 1.7 percent and 1.6 percent, respectively. Economic activity contracted in the second quarter and was sluggish in the fourth quarter, reflecting external shocks from the natural disasters in Japan, the sputtering U.S. recovery and the escalation of the eurozone crisis. Canada’s growth in 2011 was largely driven by domestic strengths. Business investment and confidence rose and many new jobs were added during the year, carrying the employment level over the the pre-recession peak. With the manufacturing sector still operating at roughly four fifths of its capacity, the Bank of Canada conducted an easy monetary policy that was not limited by concerns about inflationary pressures. One downside to the current prolonged period of low interest rates is Canada’s record-high household debt, with the consumer debt-to-personal disposable income ratio now above 150 percent.
Canada’s solid trade and economic performance has translated into a healthier fiscal position. According to the recently released Budget 2012, the fiscal deficit for 2011-12 fiscal year is now expected to come in at $24.9 billion—$7.4 billion less than projected in the Budget 2011—due to better than expected revenue growth. Despite expected deficits over the next few years, Canada remains on track to reach a balanced budget over the medium-term. Canada still boasts the strongest fiscal position in the G-7, and the IMF projects Canada’s total net debt-to- GDP ratio will remain the lowest among the G-7 countries and be at about one third of the G-7 average in 2016.
Gross Domestic Product
Canada’s real GDP contracted 2.8 percent in 2009 on the heels of the global recession, but economic activity rebounded in 2010 with 3.2-percent growth (see Figure 3-2). In 2011, real GDP continued to recover, but at a slower pace, increasing 2.5 percent for the year as a whole. There was a contraction in the second quarter amidst troubling economic conditions in Europe, Japan and the United States, which generated considerable uncertainty, but growth picked up again in the second half of the year as the outlook improved. Growth slowed again in the fourth quarter due to the resurgence of the eurozone crisis.
|Source: WTO Secretariat|
Contributions to Real GDP Growth
Analysis of the expenditure components of GDP (Figure 3-3) shows that most of the GDP growth in 2011 was due to increased business expenditures, which contributed 1.79 percentage points to the increase in real output (nearly three quarters of the whole). Business investment grew at a very brisk pace in 2011, at 10.2 percent for the year.
The bulk of the growth in business investment came from investment in machinery and equipment, which grew at 13.7 percent. Growth in investment in industrial machinery was particularly strong, at 23.4 percent. Rapid growth occurred in computers and other office equipment (up 19.6 percent); trucks (up 19.4 percent); and agricultural machinery (up 18.7 percent). In contrast, investment in furniture (up 5.4 percent), software (up 3.5 percent) and automobiles (up 0.7 percent) grew more slowly.
|Source: WTO Secretariat|
Business investment in non-residential structures (manufacturing plants) grew at the same pace as investment in machinery and equipment (13.7 percent). Investment in engineering structures drove this growth with a 17.2-percent increase, while investment in buildings grew more slowly at 4.6 percent.
Investment in residential structures advanced only 2.3 percent in 2011, a sharp slowdown from 10.1 percent in 2010. Growth in the value of new housing construction (up 1.6 percent) and renovations (up 1.7 percent) lagged behind the increases in ownership transfer costs (up 5.5 percent). Sales of new dwellings (including land), were down 5.4 percent last year, with sales of single dwellings decreasing more sharply, at 7.3 percent; sales of multiple dwellings contracted 2.1 percent.
The restocking of inventories continued even more briskly than in the previous year, with business investment in inventories growing 36.2 percent in 2011. Business investment in non-farm inventories expanded 21.9 percent from the previous year, to $9.1 billion, most of that increase occurring in the wholesale trade sector, which grew 92.0 percent. Wholesale inventories of both durable and non-durable goods expanded considerably, although offset by the drop in retail inventories of motor vehicles. Manufacturing inventories of durables expanded 13.4 percent, but manufacturing inventories of non-durables contracted 8.6 percent. Farm inventories expanded to $1.5 billion, with growth in grain inventories leading the way.
Real personal expenditures on consumer goods and services slowed down in 2011, increasing only 2.2 percent. This added 1.29 percentage points to real GDP growth, a reduction from the 2.01-percentage point contribution the year before. Growth in this category was driven by expenditures on services, which expanded 3.0 percent. That growth resulted in a contribution of 0.98 percentage point to real GDP growth, also a reduction from a 1.20-percentage points contribution in 2010. Growth in durables, semi-durables and non-durables was weaker at 1.1 percent, 1.7 percent and 1.0 percent, respectively. All of these items contributed less to the real GDP growth than in the previous year, with the total contribution from goods amounting to only 0.31 percentage point compared to 0.81 percentage point in 2010.
Among major sectors, real consumer expenditures rose the most in the clothing and footwear sector in 2011, with a 4.4-percent increase in spending amounting to $1.9 billion. Furniture, furnishings and household equipment and maintenance was the slowest-growing of the major sectors, expanding just 0.4 percent (up $0.3 billion). Expenditure growth by subsector was the highest for natural gas (up 6.2 percent), other fuels (up 5.6 percent), women’s and children’s clothing (up 5.6 percent), purchased transportation (up 5.2 percent) and net expenditures abroad (up 9.8 percent). By contrast, during 2011 declines occurred in expenditures on new and used motor vehicles (down 0.4 percent), tobacco products (down 1.2 percent), semi-durable household furnishings (down 0.4 percent), reading and entertainment supplies(down 2.2 percent), recreational services (down 1.4 percent), and personal effects (down 4.3 percent).
Government contribution to the growth in real GDP was the lowest in five years, totalling 0.17 percentage point. Total government spending and investment grew only 0.5 percent in 2011. A 2.9-percent decrease in government investment, which dragged GDP down by 0.12 percentage point, was offset by a 1.2-percent increase in government spending on goods and services, which contributed 0.28 percentage point to real GDP growth.
Real exports and imports of goods and services rose by 4.4 percent and 6.5 percent, respectively. Slower export growth slowed the contributions of exports to GDP to 1.33 percentage points in 2011, down from 1.83 percentage points in 2010. However, the negative contribution from growth in real imports decreased even more, from 3.95 percentage points in 2010 to 2.05 percentage points in 2011. As a result, trade was a drag on growth last year, but to a much lesser extent than in three of the previous four years: the net exports contribution was negative 0.72 percentage point last year, an improvement on the negative 2.12-percentage points contribution in 2010.
Volume of exports of goods and services increased by $19.4 billion in 2011. Most of this increase (over 96 percent) was due to the increase in exports of goods, which was split between four principal sectors: machinery and equipment, industrial goods and materials, automotive products and energy products, in that order. Commercial services played an important role in services exports, accounting for over half of the overall $0.9-billion increase.
Volume of imports of goods and services grew by $37.1 billion in 2011, and, as with exports, most of the growth was due to increased imports of goods (which grew by $31.3 billion, or 84.3 percent of the total increase), although the contribution of goods was less overwhelming than for exports. Gains were concentrated in machinery and equipment ($22.3 billion, or 71.2 percent of the total increase in imports of goods). Industrial goods and materials (up $5.2 billion) and automotive products (up $4.7 billion) posted the other notable increases. Imports of services grew by 5.7 percent in real terms, gaining $5.8 billion. Travel services contributed most to the increase, at $2.3 billion, with transportation and commercial services splitting the rest almost equally.
GDP by Industrial Activity
Industrial activities expanded by 2.6 percent in 2011, with greater growth in goods production (up 3.5 percent) than in services production (up 2.2 percent).
All goods-producing sectors grew in 2011, with utilities (up 4.4 percent) leading the way. The increase in natural gas distribution (up 6.5 percent) contributed the most to the growth in utilities, while water, sewage and other systems held back (up 1.2 percent). Electric power generation advanced 4.4 percent in 2011.
Growth in the mining, oil and gas extraction sector (up 4.3 percent) was close behind utilities, driven by oil and gas extraction, its dominant component, which increased 3.1 percent during the year. Faster growth in mining (up 5.2 percent) was driven by the increases in copper, nickel, lead and zinc ore mining (up 17.9 percent) and potash mining (up 13.7 percent). Support activities for this sector grew 15.3 percent in 2011.
The construction sector grew 4.1 percent during the year, driven by the 6.9-percent advance in engineering, repair and other construction activities. Output in the agriculture, forestry, fishing and hunting sector expanded 2.0 percent in 2011, with forestry and logging output growing by 9.2 percent and animal production decreasing 2.0 percent.
External demand for Canadian goods slowed in 2011, with the recovery in the United States still slow and uncertain and the European crisis flaring up once again. The volume of manufacturing output, which accounts for just under half of the goodsproducing industries, grew 2.4 percent during the year, slowing down from the previous year’s growth rate of 5.2 percent. Nevertheless, manufacturing output declined in real terms in many sub-sectors, including food manufacturing (down 0.4 percent), beverage and tobacco product manufacturing (down 1.5 percent), textile product mills (down 3.9 percent), clothing manufacturing (down 3.5 percent), paper manufacturing (down 2.2 percent), printing and related support activities (down 3.0 percent), petroleum and coal products manufacturing (down 4.4 percent), chemical manufacturing (down 1.4 percent) and furniture and related product manufacturing (down 1.7 percent).
These losses were offset by solid growth in other areas, especially in machinery and metal manufacturing. Real output in machinery manufacturing expanded 16.3 percent and exceeded pre-crisis levels; output in computer and electronic product manufacturing expanded 5.5 percent; and output in electrical equipment, appliance and component manufacturing expanded 5.9 percent, all of these increases greater than in 2010. Primary metal manufacturing grew 3.2 percent in real terms, while fabricated metal product manufacturing gained 5.7 percent. Real output increases also took place in textile mills (up 4.1 percent), leather and allied product manufacturing (up 3.5 percent), wood product manufacturing (up 0.9 percent), plastics and rubber products manufacturing (up 4.6 percent), non-metallic mineral product manufacturing (up 1.5 percent), transportation equipment manufacturing (up 3.3 percent) and miscellaneous manufacturing (up 2.6 percent). In total, 12 of the 21 major manufacturing sectors grew while 9 declined, but the increases occurred, arguably, in more skill- and capital-intensive areas with a high degree of added value.
Output in services, traditionally less volatile than output in goods, grew 2.2 percent overall. Transportation and warehousing services grew 3.8 percent; real estate, rental and leasing increased 3.0 percent; and professional, scientific and technical services grew 2.7 percent. Wholesale and retail trade volumes increased by 2.8 percent and 2.1 percent, respectively. Finance and insurance grew by 2.2 percent, and health care and social assistance expanded by 2.1 percent. Arts, entertainment and recreation was the only major services sector to decline, down 1.2 percent in 2011.
Gross Domestic Product by Province
Canada’s increase in real output in 2011 was felt across the country, with all provinces and two of the three territories posting positive growth. The increases were not spread evenly, however. Nunavut, Yukon, Alberta and Saskatchewan grew the fastest in 2011 due to increased exploration, mining and related construction activities. New Brunswick and Nova Scotia were the slowest-growing provinces in the country.
In Newfoundland and Labrador, real output advanced 2.8 percent in 2011 after leading all provinces with 5.8-percent growth in 2010. Significant increases in metal ore mining output drove this increase, as well as output in non-residential and engineering construction related to mining and oil projects. Output in fishing, hunting and trapping industries also increased, as did the manufacturing of seafood products, both of which contributed to gains in wholesale trade. Real output in the services sector rose 2.4 percent; increases in finance, insurance and real estate and in architectural, engineering and related services led the way.
|Source: Statistics Canada|
In Prince Edward Island, real GDP expanded 1.1 percent in 2011, down from a 2.7-percent increase in 2010. A 1.7-percent increase in services output offset a decrease of 0.8 percent in goods output. Non-residential construction, utilities, retail trade and finance, insurance and real estate services drove the increase in services. By contrast, lower fishing activity and a smaller potato crop as a result of poor weather offset the growth in manufacturing of frozen food products, leading to the decline in the output of goods. A contraction in transportation equipment manufacturing and miscellaneous manufactured products also contributed to this decline.
In Nova Scotia, real GDP increased 0.3 percent in 2011 after growing 1.6 percent in 2010. As in Prince Edward Island, there was a decrease in real output in goods-producing industries (down 4.0 percent). Gains in fishing, food manufacturing and manufacturing of rubber and plastic products were offset by declines in output in oil and gas extraction, construction and transportation equipment. Services output advanced 1.4 percent, however, as output rose in finance, insurance and real estate and in health care and social services.
New Brunswick posted the smallest real GDP growth among the provinces, at 0.1 percent in 2011, after a 3.0-percent increase in 2010. Output fell in most goods sectors: construction, manufacturing, forestry and logging, and utilities. Crop production fell 16.0 percent, driven by a smaller potato harvest due to inclement weather conditions. In services, output in wholesale trade and transportation services declined along with the declines in goods output, but overall services output increased 1.2 percent. This increase was led by finance, insurance and real estate services.
In Quebec, real GDP expanded 1.7 percent in 2011, decelerating from a 2.5-percent increase in 2010. Growth was mostly due to the output of services increasing 1.7 percent, led by wholesale trade; transportation and warehousing; finance, insurance and real estate; and architectural, engineering and related services. Manufacturing output increased slightly, with growth in output of transportation equipment and machinery offset by lower output of chemicals (including pharmaceuticals) and wood and paper products. Higher levels of mine engineering work and residential construction led the increases in construction activity, which grew 4.1 percent. Other goods sectors contributing to the growth were utilities and forestry and logging.
In Ontario, real output rose 2.0 percent in 2011, slowing down from 3.2 percent in 2010. Manufacturing output increased 2.4 percent in 2011, the second consecutive year of growth following four years of declines. Many heavy manufacturing industries grew, including machinery, primary and fabricated metal products, plastic products and other transportation equipment. Production of motor vehicles and parts fell, largely as a result of supply chain disruptions caused by the disasters in Japan. In addition to the higher manufacturing output, increases in metal ore mining and exploration activity also fuelled growth. Construction output increased 0.9 percent as increases in residential and nonresidential building offset a decline in electric power engineering construction. Growth in the services sectors was 1.9 percent. Increases took place in finance, insurance and real estate services; professional, scientific and technical services; and accommodation and food services. Advances in wholesale trade and transportation and warehousing services took place as well as a result of increased goods production.
In Manitoba, real output increased 1.1 percent in 2011, following a 2.2-percent gain in 2010. GDP derived from crop production fell sharply (down 21.0 percent) due to heavy rains and flooding. Output in service industries grew faster than in goods industries, with gains in retail trade; finance, insurance and real estate; and accommodation and food services. On the goods side, construction output declined 4.0 percent with the conclusion of work on major engineering projects. Goods manufacturing declined slightly (down 0.1 percent) as gains in manufacturing of chemicals and agricultural and mining equipment were offset by losses in output of food, fabricated metal and printed products.
In Saskatchewan, real GDP expanded 4.8 percent in 2011, an improvement on the 4.2-percent increase of 2010. Growth was brisk in goods-producing industries at 5.9 percent, while services advanced 3.8 percent. Crop production grew by 10.0 percent, aided by favorable weather conditions. Strong export demand led to higher output in non-metallic mineral mining (including potash), exploration, and engineering construction activity. Growth in the goods sector was accompanied by growth in wholesale trade and transportation and warehousing services. Strong population growth led to growth in retail trade and in finance, insurance and real estate services as well as a 21.0-percent increase in residential construction.
In Alberta, real output grew 5.2 percent in 2011, faster than the 3.3-percent growth in 2010. This was the strongest economic performance among Canada’s provinces. Higher energy prices led to an increase in oil and gas extraction and exploration activities. Construction of oil and gas engineering projects also contributed to the growth. Output in the manufacturing sector increased 10.9 percent with large gains in the output of machinery, fabricated metal products, chemicals and wood products. Output of services increased 4.1 percent, driven by growth in retail and wholesale trade; transportation services; professional, scientific and technical services; and accommodation and food services.
In British Columbia, real GDP increased 2.9 percent, following a 3.2-percent increase in 2010. Output in goods industries led the increase (up 5.6 percent). Increased global demand for natural resources led to growth in oil and gas extraction, engineering construction and machinery manufacturing. Support activities for mining and oil and gas extraction rose 24 percent from increased mineral and natural gas exploration activity. Strong export demand also contributed to growth in forestry and logging and in manufactured wood products. Output of services rose 2.0 percent, led by gains in transportation and warehousing and in finance, insurance and real estate.
Output in the territories is typically more volatile than in the provinces due to their smaller populations and greater dependence on such activities as mining and exploration where GDP can vary considerably from year to year. In the Northwest Territories, real GDP declined 5.5 percent in 2011 following a 1.3-percent increase in 2010. Output in mining and oil and gas extraction fell 13 percent, led by a large drop in diamond mining. However, support activities for mining and oil and gas extraction posted a 21-percent increase due to higher exploration activity. Construction declined 5.3 percent, driven by a decrease in the building of commercial and institutional structures, despite increased construction activity at new mines.
In Nunavut, real output expanded 7.7 percent in 2011, following an 11.3-percent gain in 2010. As the price of gold climbed higher for the second consecutive year, the output of gold and silver ore mining continued to increase. The high price of gold also spurred exploration activity and construction as work on a new mine got underway. Non-residential construction activity decreased in 2011 after two years of growth. Wholesale trade declined due to reduced wholesaling of machinery and equipment.
In Yukon, real GDP grew 5.6 percent in 2011 after a gain of 4.0 percent in 2010. Higher commodity prices led to increases in output of support activities to mining and oil and gas extraction, and exploration for gold and silver hit record levels. Production in the metal ores sector increased with the opening of a new silver mine. Output in construction rose 21 percent as work on a new metal mine continued, which also caused gains in wholesale trade and transportation services. Retail trade gained 6.6 percent and the finance, insurance and real estate sector increased by 4.7 percent.
The recovery in employment in Canada continued in 2011, although the economy created jobs at a reduced pace compared to 2010. Employment increased by 1.1 percent over the course of the year (December 2010 to December 2011), resulting in 190,000 new jobs. During the year, 205,000 net new full-time jobs were created, and net 15,000 part-time jobs were lost. From the start to the end of the year, the national unemployment rate did not decrease significantly, edging down by only 0.1 percentage point from 7.6 percent in December 2010 to 7.5 percent in December 2011. The average for the year as a whole, however, declined more substantially— by 0.5 percentage point to 7.5 percent (see Figure 3-5).
|Source: Statistics Canada|
Gains in employment were not distributed evenly across the country. Most Atlantic provinces saw small job gains during the year—from 1,100 new jobs in New Brunswick, all of them part-time, to a 4,300-job gain in Newfoundland and Labrador, all of them full-time. Nova Scotia was the leader in job creation in this region, gaining 11,300 new jobs, and improving its unemployment rate from 10.5 percent in December 2010 to 7.8 percent in December 2011.
Quebec was the only province to lose jobs last year, its employment decreasing by 55,900 jobs. The unemployment rate increased 1.3 percent during the year to 8.7 percent in December 2011. Manitoba saw small job gains that left its unemployment rate essentially unchanged, while Saskatchewan’s unemployment rate fell 0.3 percentage point to 5.2 percent at the end of 2011, with marginal changes in employment but a decrease in the participation rate.
The big winners in the employment picture in 2011 were Alberta and Ontario. Alberta created over 100,000 of new fulltime jobs (with 99,300 new jobs overall) while its unemployment rate decreased from 5.6 percent in December 2010 to 4.9 percent in December 2011. Ontario gained 84,500 jobs, decreasing its unemployment rate by 0.5 percentage point to 7.7 percent by the end of the year. British Columbia also generated 32,600 new jobs, a significant gain, reducing its unemployment rate to 7.0 percent in December 2011, down from 7.6 percent in December 2010.
Jobs stagnated in the goods-producing sectors in 2011, which generated only 6,800 jobs, an increase of 0.2 percent. Job gains in the construction sector (up 35,800 jobs) and aggregate gains in forestry, fishing, mining, quarrying, oil and gas industries (up 25,200 jobs) were offset by the continued decline of employment in the manufacturing sector (down 48,600 jobs, a 2.7-percent decline) and the utilities sector (down 14,000 jobs, a 9.5-percent decline).
Over 96 percent of job creation took place in the service sector last year. Serviceproducing industries gained 183,100 jobs, amounting to a 1.4-percent gain in employment. Most of the gains took place in professional, scientific and technical services (up 79,500 jobs, a 6.2-percent expansion), accommodation and food services (up 65,400 jobs, a 6.2-percent increase) and health care and social assistance (up 56,000 jobs, a 2.7-percent increase). Losses were also common, but less significant—finance, insurance, real estate and leasing lost 33,500 jobs; business, building and other support services lost 16,200 jobs; and transportation and warehousing services lost 15,700 jobs.
At the end of the year 2011, employment stood at 17.35 million, well above its 17.18 million pre-recession high in October 2008 with almost 180,000 new jobs created. While employment stagnated in the first two months of 2012, jobs growth returned in March with 82,300 new jobs, driving the unemployment rate down to 7.2 percent. Canada’s participation rate suffered a hit during the recession that has yet to be corrected, although it was not nearly as pronounced as in the United States. The participation rate declined from about 67.5 percent during the2007-2008 period to 66.8 percent by October 2009. After improving marginally to 67.1 percent by January 2011, the rate declined to 66.7 percent in December 2011—essentially unchanged from October 2009.
Consumer prices rose 2.9 percent over the course of 2011, following an increase of 1.8 percent in 2010, as reflected by the basket of goods and services used by Statistics Canada in the calculation of its Consumer Price Index (CPI). Faster inflation in 2011 was largely due to higher prices for gasoline and food items. The 2011 increase was slightly higher than the annual average growth rates observed in the early 2000s. Prices rose in all eight major components during the year, with transportation and food continuing to post the largest increases. The rate of inflation was higher than last year in seven of the eight major components of the CPI.
Food prices advanced 3.7 percent during the year, a much faster rate of growth than the 1.4-percent growth in 2010. Prices for food purchased from stores rose 4.2 percent, much faster than the 1.0-percent growth in the previous year, with vegetables leading the increase with 7.1-percent growth. Prices of meat and meat products advanced 5.3 percent, and prices of bakery and cereal products by 5.2 percent. The growth in prices of food purchased from restaurants grew more slowly at 2.8 percent in 2011.
Shelter costs rose 1.9 percent, accelerating slightly from 1.4-percent growth in 2010. The increase was driven by the costs of water, fuel and electricity rising 4.0 percent, which in turn were primarily explained by a 25.2-percent increase in costs of fuel oil and other fuels. The costs associated with household operations, furnishings and equipment rose 1.9 percent in 2011, primarily driven by the costs of services in this area, as the prices of household services and equipment actually declined 0.3 percent. Prices of clothing and footwear increased marginally last year (up 0.3 percent), reversing the declines of the three previous years. Prices of clothing and footwear still declined, but the costs of related accessories and services have offset that decline and resulted in overall growth.
Transportation costs drove the overall CPI increase, with prices rising 6.4 percent in this area. This was explained by the higher cost of gasoline, which rose 20.0 percent on the year. Prices for public transportation grew 5.6 percent, driven mainly by the 7.7-percent increase in inter-city transportation prices.
Prices in the health and personal care sector advanced 1.7 percent during 2011, following a 2.7-percent increase in 2010. Increases in prices of services were the main drivers, with health care services rising 2.9 percent and personal care services 4.0 percent.
Prices in recreation, education and reading increased 1.2 percent last year, a slightly higher inflation rate that in the three previous years. Prices for goods associated with this category generally fell—video equipment by 12.0 percent, audio equipment by 5.6 percent and digital computing equipment by 11.3 percent. However, the prices of education (including tuition fees), various cultural and recreational services and fuel for recreational vehicles combined to increase overall prices for this category.
Finally, prices for alcoholic beverages and tobacco products rose 1.9 percent, similar to the average increase in the last few years. Most of the increases came from the higher prices of tobacco products (up 3.7 percent), and additionally from higher prices of beer served in licensed establishments (up 2.7 percent), while the cost of alcoholic beverages purchased from stores fell 0.5 percent.
By province, inflation was the highest in the Atlantic provinces: Nova Scotia led the country with 3.8-percent inflation, followed by New Brunswick with 3.5 percent and Newfoundland and Labrador close behind with 3.4 percent. Prices rose 3.0 percent during the year in Quebec and Manitoba and 3.1 percent in Ontario. Alberta and British Columbia each posted the lowest inflation rate in the country—2.4 percent.
The Bank of Canada’s core index1 increased 1.9 percent for 2011 as a whole after rising 1.5 percent in the previous year.
The Canadian Dollar
After appreciating 10.9 percent against the U.S. dollar in 2010, the Canadian dollar continued to rise in 2011, although not as sharply. The 250-day average valuation of the Canadian dollar was US$1.011 in 2011. That represented an appreciation of US4.01¢ over the year, or 4.1 percent. Relative to the other major currencies, the average yearly value of the Canadian dollar declined 0.8 percent against the European euro, 5.3 percent against the Japanese yen, but rose 0.4 percent against the British pound sterling.
|Source: Bank of Canada|
As far as the yearly dynamics are concerned, the movement of the Canadian dollar against the U.S. dollar was restricted to a 12-cent band during the year (from US$0.94 to US$1.06). On January 4, 2011, the Canadian dollar was at parity with the U.S. dollar (US$1.001), and from there its value rose slowly for four months to reach a high of US$1.054 by the end of April. After retreating to US$1.014 in June, it climbed again to US$1.058 by late July. From there, the Canadian dollar gradually declined to parity in late September, and then lost over 3 percent of value on September 22. After hitting a low of US$0.943 on October 4, it reached parity again at the end of October and a few more ups and downs at the end of the year brought it to US$0.983 on December 30, the final trading day of the year.2
Diverging Crude Oil Prices in North America— the Implications for Canada’s Trade Balance
The price of oil is subject to large, shortterm fluctuations, but has been trending upward overall since 2002. As Canada is a net exporter of oil, this upward trend has had a positive effect on terms of trade and national income and has notably helped increase the profitability of developing the oil sands.
|Data: US Energy Information Administration|
However, a new phenomenon has been observed since the end of 2010. For one thing, while the prices of Brent and West Texas Intermediate (WTI) were essentially identical historically, an increasingly pronounced gap has been observed between them (Figure 1). According to the Bank of Canada, the gap can mainly be explained by an excess crude oil supply in the United States at Cushing, in Oklahoma. This surplus is notably the result of technical problems related to pipeline transportation and refining, and of the new shale oil developments, which can be found all over North America, including in regions that have not produced oil historically. The arrival of shale oil has resulted in greater diversification in production sources and an increase in North American supply. This excess supply and the inadequate transportation capacity are driving down WTI prices relative to the price of Brent.
Furthermore, the difference in processing costs between Western Canadian Select (WCS) on the one hand and WTI and Brent on the other explains the negative price differential between these products on the world market. As WCS is heavier, there are higher production costs and the resulting products are generally less valuable.1 However, since mid-2011, the price difference has grown wider with WTI (Figure 2). According to Scotia Economics, the insufficient pipeline capacity and temporary refinery shutdowns have played a major role in this imbalance, as has the decrease in U.S. demand, which declined 1.6 percent2 in 2011.
|Data: Natural Resources Canada, US Energy Information Administration|
As the oil market is a global one, Canada has very little influence on price. Almost all crude oil exports are to the United States and exports from the West are generally sold at WCS prices. Diversifying our trading partners could allow Canada to be less dependent on the U.S. market and make the most of the growing demand from emerging countries, particularly China. That is also why projects like the Northern Gateway Pipeline, which notably help increase transportation capacity, could benefit Canada’s oil industry.
Imports, which come mainly from Europe and the Middle East, are generally purchased at Brent prices. Although this higher import price increases production costs for companies that use oil as a production input and increases the price of consumer goods, these negative effects are normally compensated with increased revenues for domestic oil producers. Consequently, Canada has a certain immunity to increases in oil prices.
|Price ($/Barrel)||WEST IM||EAST IM||WEST EX||EAST EX|
|Data: Office of the Chief Economist, DFAIT|
This was not the case in 2011: the increased import price was not counterbalanced by an equivalent increase in export price. Although exports from the East were generally sold at Brent prices, this gap was not enough to reverse the negative impact of exports from the West, which were sold at WCS prices.3 This phenomenon helped reduce the crude oil trade balance and decreased Canada’s terms of trade in the energy sector. According to the April 2012 Monetary Policy Report, this situation also played a role in reducing the real income of Canadians.
To quantify the impact of this gap, we can estimate what the trade balance would be if the price of Brent were the import and export reference price. The trade balance is calculated using monthly data from the January 2010 to December 2011 period.4 After taking into account the difference in oil processing costs for exports from the West—subtracting the average historical difference between WCS and WTI for the period between January 1998 and October 2007, which was estimated at $8.49—we see that the monthly trade balance for crude oil would have been, on average, $891 million higher throughout 2011.5 By comparing it to the actual balance, which was $40.27 billion for 2011, we can conclude that the hypothetical loss of export revenue associated with the increasing gaps between Brent, WTI and WCS was $10.7 billion,6 that is, the sum of the gaps between the hypothetical and real trade balances (Figure 4). For a better understanding of the relative size of the cost of this loss, note that this represents 0.6 percent of the nominal GDP. If this phenomenon is maintained, it will continue to decrease Canada’s trade balance and play a role in slowing national income growth.
|Data: Natural Resources Canada, Office of the Chief Economist, DFAIT, US Energy Information Administration and the Bank of Canada|
1 Government of Canada, Natural Resources Canada
2 Scotiabank, Global Economic Research, Scotiabank’s Commodity Price Index Declines in March, April 2012
3 The West includes Alberta, Manitoba, Saskatchewan and British Columbia, and the East includes Ontario, Quebec, New Brunswick, Newfoundland and Labrador, and Prince Edward Island.
4 Office of the Chief Economist, DFAIT
5 The hypothetical trade balance was calculated by assessing the value of imports and exports from the East at the Brent price. For exports from the West, the price used in this exercise corresponded to the Brent price adjusted downward to take into account the difference in processing costs, which is $8.49.
6 Two more hypothetical scenarios were prepared to estimate the loss of export revenue. The first assessed the value of imports at the Brent price, but removed the exporter region for exports, using the adjusted Brent price to take processing costs into account for the East and the West. According to that scenario, the loss is estimated at $10.2 billion for 2011. In the second scenario, exports from the East and the West were also assessed at the adjusted Brent price to take processing costs into account, but the actual import prices were kept (not the Brent price). According to this second scenario, the loss is estimated at $11.8 billion for 2011.
1 The Bank of Canada’s core index is a special aggregate of the CPI that excludes eight of its most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components. It is used by the Bank of Canada as a policy instrument to help see through the temporary volatility in prices and maintain overall inflation within the 1 to 3 percent target range.
2 Bank of Canada daily noon exchange rate statistics at http://www.bankofcanada.ca/rates/exchange/10-year-lookup/
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