In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Canada’s Non-Energy Exports: Assessment of Post-Crisis Growth Performance1

A. Context

1. Despite the recent pickup, the post-crisis recovery in Canada’s non-energy exports2 has been lackluster. Canada’s non-energy exports rebounded strongly from the collapse in 2009 over the period of 2010–11, but then failed to carry on the growth momentum. Over 2012–2014:Q1, exports recorded a disappointing -0.5 percent growth (q-o-q, annualized) in volume terms. As a result, even with the pickup in 2014:Q2, Canada’s non-energy exports stood at about 8 percent below the pre-crisis peak level in volume, although in value terms they have just surpassed the pre-crisis peak.

2. To a large extent, this subpar recovery reflects the persistent weak demand in Canada’s major export destinations following the crisis. This includes the United States that account for about three quarters of Canada’s merchandise exports. Compared to past downturns in Canada’s foreign demand, the level of non-energy exports in 2014:Q2 is only at about 70 percent of the historical average and 90 percent relative to the last downturn that started in 2001:Q1. The strengthening of the Canadian dollar during 2009–11 also had a dampening effect on growth, appreciating by a substantial 20 percent in real effective terms.3 Even after accounting for these already well-known factors, however, the poor performance since 2012 has been seen as puzzling in light of the ongoing recovery in the United States and the depreciation over 2012–13, and has attracted much public attention.

A01ufig01

Canada’s Non-Energy Goods Exports During Foreign Demand Downturn 1/

(Volume Index, T0: Foreign Demand Cycle Peak)

Citation: IMF Staff Country Reports 2015, 023; 10.5089/9781498385305.002.A001

Sources: Statistics Canada; IMF staff estimates.1/ Foreign demand downturn s for Canada are identified by applying the Harding and Pagan (2002) turning point algorithm to the Bank of Canada’s foreign activity indicator.

3. The picture at the product level reveals significant differences in terms of the strength of the export recovery. Among the major export product categories, motor vehicle and parts, metal ores and non-metallic minerals, and farm and fishing products have posted the highest cumulative growth since 2009Q1 in volume terms, whereas traditional industrial inputs such as machinery and equipment have either declined or stagnated (Chart). With the exception of motor vehicle exports, most of the products leading the non-energy export growth so far have come from non-manufacturing sectors such as mining and agriculture. The relative weakness of manufacturing export growth is not new: the sector has been on decline since the early 2000’s owing to tougher competition from emerging markets4 and Canada’s low productivity growth, among other factors. Sectors based on raw materials (other than energy), on the other hand, enjoyed robust growth over the same period, accounting for an increasingly larger share of Canada’s non-energy exports. It is therefore important to take into account these long-term trends across different types of industries when making an assessment of Canada’s recent export performance. Another important aspect to consider is the possibility that these long-term dynamics from the pre-crisis period have structurally changed since the crisis, especially given the unprecedented magnitude of the global financial crisis and the exceptionally persistent weakness in the global economy.

A01ufig02

Recovery from Global Financial Crisis

(Volume, cumulative growth since 2009Q1, percent)

Citation: IMF Staff Country Reports 2015, 023; 10.5089/9781498385305.002.A001

Sources: Statistics Canada; IMF staff estimates.

4. In this paper, we assess Canada’s post-crisis export performance of non-energy products using model-based benchmarks. Specifically, the analysis explores whether the pre-crisis relationship between Canada’s non-energy exports and their determinants still holds in the post-crisis period. The analysis covers 23 product categories that comprise about 77–84 percent of Canada’s non-energy exports over the sample period of 1986:Q1–13:Q4, of which 21 products belong to the manufacturing sector. We then make assessments of their actual export performance using the respective model-estimated benchmarks obtained from the export demand equations. In the second part of the paper, we check whether the observed post-crisis performance of individual products is substantial by historical standards, by testing for possible structural breaks around the crisis period. For this, we adopt the multiple structural change identification method proposed by Bai and Perron (1998, 2003), which allows estimation of an unknown number of multiple breaks at a priori unknown points in time. Finally, we focus on the products with a structural break around the crisis period and examine the relative importance of contributing factors to their post-crisis growth.

B. Framework

5. To obtain our model benchmarks, we estimate export equations for 23 individual non-energy products with respect to foreign demand and relative prices. Specifically, we consider the following standard form export demand equation:

Yi,t=β0i+β1iCt+β2iIt+β3iGt+β4iFDDti+β5i(exr*pCAN,ti/pFOR,ti)+εti,εtiN(0,σε,i2)

The dependent variable, Yi,t, denotes the level of Canada’s exports of product i in quarter t in volume terms, and the independent variables Ct, It, and Gt refer to the level of real private consumption, business investment, and government gross investment (federal, state, and local), respectively in the United States—Canada’s dominant trading partner. In addition, we have a term capturing the demand from the rest of the world (FDDti) defined as the export destination-share weighted average of final domestic demand5 for product i. The variables are all expressed in log-level terms and therefore the coefficients correspond to the usual long-run elasticity of product i with respect to each of these demand components. The relative export price variable (exr*pCAN,ti/pFOR,ti) is the ratio of Canada’s export price for product i denominated in U.S. dollars to the export destination-share weighted price of this product in major export destinations (U.S. dollar denominated), including the United States (see Data Appendix for details). The standard unit root and the Johansen test results indicate that the series in each export equation are first-order integrated and that there exists at least one cointegration relationship among these series. Based on these results, we take as the model benchmarks the fitted values of Y obtained from the regression over the entire sample period.6

6. Examining potential structural breaks then helps identify if export performance has structurally changed after the crisis. From the benchmark model, we then test for structural breaks in each equation using the sequential “l vs. l+1” breakpoint method developed by Bai and Perron (1998, 2003), allowing shifts both in the intercept and the coefficients.7 In addition to the product-specific equations, we also estimate a similar equation for Canada’s total non-energy exports, using the real effective exchange rate (REER) instead of the individual relative export price and similarly test for the presence of structural breaks.

7. The approach in this paper has several advantages, but also comes with a few caveats. The product-level analysis enables a granular assessment of Canada’s non-energy export performance, helping us better understand the forces underlying recent developments—taking into account past trends and breaks in individual export sectors. The non-U.S. foreign demand term is an important addition given Canada’s export destination diversification in recent years. On the downside, the analysis ignores the supply side and the coverage of sample products is rather limited due to lack of available data. Given Canada’s size in the world economy and with respect to the United States, however, the implicit assumption of Canada being a small open economy does not seem very unreasonable.

C. Results

8. At the aggregate level, Canada’s non-energy exports do not seem to have performed particularly poorly relative to the benchmark. As of 2013:Q4, Canada’s non-energy exports were at about 5 percent below the model benchmark, although compared to the Bank of Canada’s foreign activity indicator—which includes the U.S. demand—the gap was larger at about 10 percent (Chart). Interestingly, while Canada’s non-energy export growth lagged the benchmark over 2012–13 on a cumulative basis (3.7 vs. 10.9 percent), it actually outperformed both our model benchmark and the foreign activity indicator over the entire post-crisis period of 2009:Q1 to 2013:Q4 (19.8 percent) by about 8 and 2 percentage points, respectively. This relatively higher growth could be in part ascribed to the steeper-than-expected decline in 2009, which led to sizeable gaps with respect to these measures. This could be explained, among other factors, Canada’s unfavorable export product mix at the time of the crisis, which was particularly vulnerable to the U.S. housing busts and the sharp fall in consumption on durable consumer goods such as passenger motor vehicles.

A01ufig03

Evolution of Canada’s Non-Energy Goods Exports

(Level Index, 2007Q1=100)

Citation: IMF Staff Country Reports 2015, 023; 10.5089/9781498385305.002.A001

Sources: Bank of Canada; IMF staff estimates.

9. Of the 23 non-energy products, 5 products outperformed their respective benchmarks both in growth and level terms, while 7 products underperformed by the same measures.8 On a cumulative basis, a total of 14 products grew faster than their respective benchmarks over the period of 2009:Q1–13:Q4 (“outperformers”), which together constitute more than half of Canada’s non-energy exports in 2013 on a nominal basis. And while the fast growth could be in part ascribed to the relatively steeper fall at the peak of the crisis, 5 products managed to surpass their respective benchmarks even in level terms, mostly led by final consumption goods such as passenger cars and food, beverage, and tobacco products. The performance of passenger cars and light trucks is particularly notable considering other transportation products (e.g. medium/heavy trucks/buses/other transportation equipment) are among the worst performers. Meanwhile, 9 products lagged the model benchmark over the same period in terms of the cumulative growth (“underperformers”), of which 7 fell behind also in level terms. In terms of the product categories, most of these underperformers consisted of sophisticated industrial goods, including industrial machinery and communications/audio/video equipment.

10. For some out-/underperforming products, a casual inspection of the data seems to suggest a potential trend shift around the time of the crisis. For some products, the pre-crisis trend largely extended beyond the crisis, as shown in Figure 1 (e.g. basic and industrial chemical products, cleaning products, appliances, and miscellaneous goods and supplies). For many others, however, the relative growth performance does not seem conform to their long-term trend. For example, pharmaceutical and medicinal product exports were enjoying robust growth for most of the pre-crisis period, but the post-crisis growth proved relatively much weaker. Other products, including computers and computer peripheral equipment, also exhibited a similar pattern. This leads to our next question of whether the post-crisis dynamics between Canada’s non-energy exports and their foreign demand and prices has become structurally different from the pre-crisis period.

Figure 1.
Figure 1.

Canada’s Non-Energy Exports 1/

(Log level, volume, 2007Q1=100)

Citation: IMF Staff Country Reports 2015, 023; 10.5089/9781498385305.002.A001

1/ Dashed lines indicate structural breaks identified using the sequential l vs. l+1 break point method by Bai and Perron (2003).Sources: Statistics Canada; IMF staff estimates.
A01ufig04

Frequency of Product-Level Structural Breaks 1/

(percent of product sample total)

Citation: IMF Staff Country Reports 2015, 023; 10.5089/9781498385305.002.A001

1/ Weighted by each product’s nominal share in non-energy goods exportsSources: Bank of Canada; Statistics Canada; IMF staff estimates.

11. The statistical tests show that a total of 13 products had a structural break during the global financial crisis of 2007–2008. In terms of the nominal share, these 13 products accounted for about 57 percent of total non-energy exports (Chart). In terms of the relative performance, 9 products out of the 14 outperformers and 4 out of the 9 underperformers were identified as having a break during the crisis, respectively. The tests also provide evidence for Canada’s two other potentially important breaks in the past: the launch of the NAFTA in 1994 and the China’s entrance to the U.S. market in the early 2000s. The test using the aggregate non-energy exports series also confirm these breaks, which identifies 4 distinct sub-periods ending in 1994Q2, 2000:Q4, and 2007:Q4.9

12. At the aggregate level, the time paths of non-energy exports’ elasticities confirm the increasing importance of U.S. business investment. The estimated coefficients for each sub-period show a number of well-recognized patterns of the historical relationship between Canada’s non-energy exports and their determinants. First, Canada’s non-energy exports were becoming increasingly sensitive with respect to the REER in the run-up to the crisis. Together with the REER appreciation of about 70 percent (cumulative) over 2001:Q1–07:Q4, driven in large part by the commodity price boom over the same period, this finding confirms earlier studies that found a significant detrimental effect of the REER appreciation on Canada’s non-energy exports. Second, the non-energy exports’ elasticity with respect to the U.S. business investment steadily rose since 2001, while the elasticity with respect to the U.S. consumption had been declining in the run-up to the crisis before picking up after the crisis. This could be in part due to the changing mix of Canada’s non-energy exports over this period, which shifted more toward raw-material based products than sophisticated manufacturing products such as industrial machinery and electrical equipment. Final domestic demand in the rest of the world trading partners started contributing positively to Canada’s non-energy exports since 2001, consistent with Canada’s export market diversification starting around this period.

13. The findings at the product level reinforce those at the aggregate level, but also reveal some interesting differences between across products. Table 2 compares each product’s estimated elasticities before and after the crisis. Recognizing the short sample periods involved, these findings should be taken as indicative. Consistent with Figure 2, Table 2 shows that the elasticities of individual products with respect to the U.S. investment and consumption have increased overall after the crisis, while the elasticity with respect to the REER turned positive (i.e. depreciation associated with lower exports and vice versa) for many. One possible explanation for the latter could be a delayed export reaction to the relatively large REER fluctuations over the relatively short post-crisis period (the “J-curve effect”), which stands in contrast to the steady appreciation and the gradual decline in non-energy exports prior to the crisis. Furthermore, we find that the outperformers and the underperformers identified in our analysis responded differently to changes in demand and relative prices. Most strikingly, of the 6 outperformers that had a negative relationship with the U.S. consumption prior to the crisis, the demand elasticity for 4 of them (passenger cars and light trucks, tires and motor vehicle parts, pulp and paper stock, logs, pulp wood and other forestry products) turned positive in the post-crisis period, allowing these products to benefit from the robust consumption growth in the United States. Albeit to a lesser extent, a similar pattern emerges with the rest of the world demand, in which 3 out of 5 products with negative elasticity before the crisis turned positive thereafter. This in part may reflect exporting firms’ strategic entries into non-U.S. markets in order to compensate for the loss of demand in the United States (notably, for example, forestry exports to People’s Republic of China). The underperformers, on the other hand, all had positive relationship with the U.S. consumption before the crisis, but this turned negative in the post-crisis period in 3 out of 4 products. Particularly in the case of the medium/heavy truck, bus, and other motor vehicle industry, this shift is due to the supply-side developments, including a series of plant closures following the crisis.

Table 1.

Canada’s Non-Energy Export Performance: Model-based Assessment

(All figures in percent

article image

Figures in paranthese denote the percent nominal share of each product in non-energy goods exports as of 2013Q4.

Model benchmarks are calculated from the fitted export volume of each product over the entire sample period (1986Q1-13:Q4).

Sources: Bank of Canada;Statistics Canada; IMF staff estimates.
Table 2.

Long-Run Export Elasticity: Before and After GFC1/

article image

The red/pink and black/gray circles denote positive and negative elasticity, respectively.

Sources: Bank of Canada; Statistics Canada; IMF staff estimates.
Figure 2.
Figure 2.

Canada’s Non-Energy Export Elasticity 1/

(Full Sample: 1986Q1-2013Q4)

Citation: IMF Staff Country Reports 2015, 023; 10.5089/9781498385305.002.A001

1/ Each bar indicates the coefficient’s 95 percent confidence interval.Sources: Bank of Canada; Statistics Canada; IMF staff estimates.

14. A decomposition of Canada’s non-energy export growth based on the post-crisis elasticities confirms the significant contributions from U.S. consumption and non-U.S. demand (Chart). While the U.S. business investment remains an important driver of growth for most of the out-/underperforming non-energy products, the U.S. consumption has led the growth for passenger cars and the related motor vehicle parts, as well as pulp and paper stock. Non-U.S. demand has also provided a substantial boost to forestry products and contributed significantly for intermediate metal products, paper and published products, and computers and peripheral equipment. Changes in the relative product prices, on the other hand, appear to have been a drag for a number of products, most of which saw their prices rise over the post-crisis period. Finally, the residuals for the most of the products are non-trivial and on the negative side, providing an indication that there could be other factors also responsible for the disappointing export performance. We leave it as a subject for future research.

A01ufig10

Drivers of Canada’s Non-Energy Export Growth: 2009Q1 - 2013Q4

(cumulative growth, volume, 100*log difference)

Citation: IMF Staff Country Reports 2015, 023; 10.5089/9781498385305.002.A001

Sources: Bank of Canada; Statistics Canada; IMF staff estimates.

Appendix 1. Data Appendix

This section provides more detailed description of the data sources used for the analysis in the paper:

  • Canada’s non-energy exports—The volume data for individual non-energy export products are obtained from national accounts statistics on a quarterly basis (s.a.a.r., chained, 2007 C$). The export price indices are calculated by dividing the nominal export value series by the volume series.

  • Foreign demand components—Real private consumption, business investment, and government gross investment (federal, state, local) series for the United States all come from the U.S. national accounts statistics (s.a.a.r., chained, 2009 US$). Real domestic demand series, defined as the sum of consumption, gross fixed investment, and government expenditure, for the rest of the world is calculated as the product-specific export share-weighted average of Canada’s 22 export destinations (Australia, Austria, Belgium, Finland, France, Germany, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Korea, Taiwan Province of China, Republic of China, Philippines, Singapore, Mexico, United Kingdom). The original export shares for individual products are from the U.N. Comtrade Database (SITC rev.2, available on an annual basis), which we then re-classify to match the North American Product Classification System and linearly interpolate to obtain quarterly estimates. In the case of the Republic of China, real GDP is used instead of real domestic demand due to data availability, with historical quarterly GDP estimates taken from Abeysinghe and Rajaguru (2004).

  • Foreign product prices—Foreign product price indices for individual products are calculated as the product-specific export-share weighted PPIs of the United States, euro area, Japan, United Kingdom, and the Republic of China. Due to data availability, we use product-level PPIs for the U.S., euro area, Japan, and aggregate PPIs for the United Kingdom and the Republic of China.

References

  • Medas, P. (2012), “Canada’s Loss of External Competitiveness: The Role of Commodity Prices and the Emergence of China,” IMF Country Report, No.13/40, Selected Issues.

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  • Binette, A., D. de Munnik, and E. Gouin-Bonenfant (2014), “Canadian Non-energy Exports: Past Performance and Future Prospects,” Bank of Canada Discussion Paper, 2014-1.

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    • Export Citation
  • Kejriwal, M. and P. Perron, 2010, “Testing for Multiple Structural Changes in Cointegrated Regression Models,” Journal of Business & Economic Statistics, Vol. 28 (4), pp. 503522.

    • Crossref
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  • Morel, L. (2012), “A Foreign Activity Measure for Predicting Canadian Exports,” Bank of Canada Discussion Paper, 2012-1.

  • Bai, J. and P. Perron (1998), “Estimating and Testing Linear Models with Multiple Structural Changes,” Econometrica 66, 4778.

  • Bai, J. and P. Perron (2003), “Computation and Analysis of Multiple Structural Change Models,” Journal of Applied Econometrics 18, 122.

1

Prepared by Minsuk Kim (SPR).

2

In the rest of the paper, non-energy exports refer to non-energy exports of goods only, and exclude exports of services.

3

A recent IMF study estimates that a 10 percent increase in the REER results in about 1½ percentage point decline in Canada’s U.S. market share based on the sample period of 1975–2010 (Medas, P., “Canada’s Loss of External Competitiveness: The Role of Commodity Prices and The Emergence of China,” 2012 Article IV Consultation Staff Report, Selected Issues Paper).

4

See, for example, Medas (2012).

5

Final domestic demand is defined as the sum of consumption, gross fixed investment, and government expenditure. For China, we use the gross domestic product instead due to the lack of available data. We exclude the foreign demand term for “passenger cars and light trucks”, “medium and heavy trucks, buses, and other motor vehicles,” and “aircraft, aircraft engines and part” as the U.S. share accounts for very close to 100 percent.

6

We use OLS estimates throughout this paper, which have non-standard limiting distributions when the series are cointegrated I(1)s as in this case. However, other more suitable estimation methods (including Dynamic OLS, fully-modified OLS, VECM) also produced point estimates very close to those of the OLS. It should be noted, however, that the OLS appears to underestimate the size of the coefficients for the real effective exchange rate and the U.S. consumption relative to these other methods.

7

The strategy involves first estimating l break points (T^1,T^2,,T^l) that minimizes the global sum of squared residuals and then testing for the presence of an additional break against the null hypothesis of l breaks. If the global sum of squared residuals is sufficiently small, we then reject the null in favor of the l+1 break points. In applying this method, we allow a maximum of 3 breakpoints over the sample period of 1986:Q1- 13:Q4. See Kejriwal and Perron (2010) for structural break analysis with cointegrated series. The choice of maximum 3 possible breaks is motivated by three historical events that are considered as potentially key turning points to Canada’s exports: the launch of NAFTA agreement in 1994, China’s entrance to the United States in the early 2000s, and the global financial crisis in 2007–08. The break dates identified are based on the ones obtained from the repartition procedure. Finally, we allow error variances to vary across break points.

8

The list of winners and losers identified in our analysis overlaps on many accounts with a recent study by Binette, de Munnik, and Gouin-Bonenfant (2014) from the Bank of Canada, but there also exist some notable differences (e.g. pharmaceutical). This could reflect among others the different time horizons considered and the choice of benchmarks.

9

Given the parsimonious specification used in this paper, we cannot rule out the possibility that the identified structural breaks were in fact due to the influences of other potentially important but omitted variables (e.g. those capturing non-price export competitiveness). To check the robustness of the timing of breaks against this possibility, we have run the same break test on our baseline equation augmented by the polynomial terms of the estimated Y’s as proposed in the Ramsey RESET test. Even with the additional terms, however, the Bai and Perron test still indicates a structural break in 2007 for total non-energy exports, providing an indication that the break point is robust to the potential omitted variable problem.

Canada: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.
  • View in gallery

    Canada’s Non-Energy Goods Exports During Foreign Demand Downturn 1/

    (Volume Index, T0: Foreign Demand Cycle Peak)

  • View in gallery

    Recovery from Global Financial Crisis

    (Volume, cumulative growth since 2009Q1, percent)

  • View in gallery

    Evolution of Canada’s Non-Energy Goods Exports

    (Level Index, 2007Q1=100)

  • View in gallery

    Canada’s Non-Energy Exports 1/

    (Log level, volume, 2007Q1=100)

  • View in gallery

    Frequency of Product-Level Structural Breaks 1/

    (percent of product sample total)

  • View in gallery

    Canada’s Non-Energy Export Elasticity 1/

    (Full Sample: 1986Q1-2013Q4)

  • View in gallery

    Drivers of Canada’s Non-Energy Export Growth: 2009Q1 - 2013Q4

    (cumulative growth, volume, 100*log difference)