Canada's State
of Trade 2019

After a period of broad-based and synchronized growth that lasted throughout 2017 and into early 2018, the global economy started to ease up. Global trade tensions combined with waning cyclical forces reduced economic momentum worldwide. Deceleration was widespread, even in countries like China and India. A notable exception was the United States, where tight labour market conditions and broad-based expansion bolstered the economy.

Against this backdrop of weaker economic growth, the expansion in global merchandise trade volumes slowed across both developed and emerging markets. Global merchandise trade value grew 10% in 2018, a slight slowdown from the 11% increase in the previous year. However, annual world merchandise trade still grew faster than at any time between 2012 and 2016, and global commercial services trade expanded by 7.4% in 2018, a little more than an extra one percentage point over 2017.

This backdrop coupled with global trade tensions, political uncertainty and U.S. tax reforms had an important impact on global foreign direct investment (FDI) flows. FDI flows declined by 13% in 2018, with developed European economies experiencing the largest regional decrease at 55%.

As with most major economies, Canada’s growth cooled to 1.9% in 2018, after reaching 3% in 2017. A major factor was the slowdown in household consumption growth, weighed down by household debt. Non-residential business investment made a very small positive contribution, while residential investment negatively impacted growth due to tighter mortgage guidelines. An acceleration in the growth of real exports along with a deceleration in real imports allowed trade to contribute marginally to growth in 2018, after being a drag in 2017. The Canadian labour market continued to display tight conditions, with the annual unemployment rate (5.8%) reaching record lows dating back to at least 1976, while inflation stood at 2.3% for 2018, its highest level since 2011.

On the trade front, Canada’s exports of goods and services increased 6.2% in 2018, while imports rose 5.4%. The total value of trade in goods and services reached a record high of $1.5 trillion. Canada’s goods exports played an important role in the increase, growing at 6.5% in 2018 to reach $585 billion. Energy led the way, advancing $14 billion (15%) to $111 billion, followed by consumer goods ($3.6 billion) and forestry, building and packaging products ($3.4 billion). By destination, goods exports to the United States climbed 5.4% to $433 billion in 2018. However, exports to non-U.S. destinations grew even faster, up 9.8% to $153 billion. Canadian services exports grew for the ninth consecutive year, up 5.8% to $121 billion.

Canada’s goods imports rose 5.8% to $607 billion in 2018, with increases in all sectors, led by metal ores and minerals, energy products, and aircraft and other transportation equipment. Regionally, goods imports from the United States were up 5.4% to $391 billion in 2018, while imports from non-U.S. sources grew 6.5% to $216 billion. Since Canadian goods exports expanded at a faster rate than Canadian goods imports, the goods trade deficit narrowed by $2.7 billion to $22 billion. Services imports expanded by 4.2% to reach $146 billion. Canada continued to run a services trade deficit with every broad region and most major trading partners; nearly half of the deficit was due to the United States.

Total inflows of FDI into Canada for 2018 increased by 70% to $55 billion, in contrast to the decrease experienced by most other developed economies, due to a $24-billion increase in FDI from non-U.S.  sources. Strong inflows of investment in Canada’s manufacturing sector (+45%) made up for declines in trade and transportation (-41%) and finance and insurance (-13%).

By contrast, Canadian direct investment abroad (i.e. FDI from Canada to other countries) fell by 38% to $64 billion, notably due to investment in the United States contracting by 60%. CDIA flows to the rest of the world increased by 48% or $10 billion. Overall, Canadian investors favoured the energy and mining, and manufacturing sectors, which were up by $13 billion and $10 billion, respectively.

Looking forward, continued weakness in Western Canada’s resource sector, elevated household debt, and a backlash against trade and globalization are factors that could dampen Canadian economic, trade, and investment growth. However, the Bank of Canada expects economic growth to pick up in the second half of 2019 and be sustained into 2020.

Whether the global economic context is stable or uncertain, having multiple export destinations and/or many different products to export can certainly help Canadian companies prosper by hedging risk and taking advantage of high-growth markets. This year’s State of Trade report also takes stock of research undertaken by the Office of the Chief Economist on trade diversification, both in its conventional sense as well as from the angle of diversity among exporter firms. It also features results from Export Development Canada’s research.