Cross-Canada exporting update and insights: A conversation with Peter Hall, EDC’s Chief Economist

Cross-Canada exporting update and insights: A conversation with Peter Hall, EDC’s Chief Economist

EDC Chief Economist Peter Hall has just finished a multi-week tour of speaking engagements to exporters and potential exporters across the country. The purpose of the tour was to share insights from EDC’s most recent Global Export Forecast. ExportWise sat down with him to find out what he learned and what he shared with his audiences.

You’ve been on the road since late April. Tell me about your overall impressions from the tour.

It was very interesting in the sense that this forecast wasn’t uniform across the country by any stretch of the imagination. Plunging commodity prices are punishing the energy and mining centres of Canada, so the ones that are dealing with the most difficulty are Alberta, Saskatchewan, Newfoundland and, to some extent, New Brunswick.

However, we’re dealing with a Canadian dollar that averaged about 75 cents; and while I was on the road there was clear evidence of a payback to that. One of the key messages I heard across the country was ‘Our sales activity is growing as you’ve described — 10, 20 and 30 per cent.’ Someone actually said their sales to China have doubled in the last year.

When I started off, I said to myself: ‘I know what the international trade data are saying. We had two pretty nasty months.’ So I was quite worried about getting blow-back from people saying that we’re always out there with a positive message, but that they’re getting creamed. But in fact, I got none of that. The data are saying one thing but these people are saying they’re up. They’re saying they have some concerns, but growth isn’t one of them.

Is that because they’re ahead of the reporting?

No, it’s probably because the reporting is related to transitory developments. There was a hiccup in the early part of the year in the U.S. — an inventory flip-flop that was partly weather-related and maybe related to other circumstances as well — and our view was that this was just one of the many successive interruptions the economy is having to deal with. As far as we can tell, the fundamentals are still very strong.

That was great news to get from attendees. But we didn’t get it everywhere. Certainly not from oil and gas and mining. The story that is not getting told is that other industries that are capitalizing on U.S. demand, there’s the beginnings of a rise in European demand and gains in markets that people don’t think are growing. Growth is coming from that and a cheaper Canadian dollar.

What was your main message on your tour?

Our story is really about the why of growth and that it’s not going to end anytime soon. They said ‘What you’re saying is lining up with our experience and the fact that you’re saying the fundamentals suggest that this isn’t going to end, makes us very happy.’ They’re considering the investment decisions they need to make in order to support this.

What’s keeping them up at night?

No. 1 is the U.S. election. I got that question in every place except one, and it was usually the first question asked. Question No. 2 was on the Brexit issue. They were quite concerned about what the implications would be on the British economy, the Canadian economy and for Europe in general if the British exit the Eurozone. Also, they were worried about where a Brexit puts the Comprehensive Economic and Trade Agreement between Canada and the EU.

What did you tell them about the U.S. question?

Protectionist rhetoric always happens during a U.S. election. It sells really well, especially when you have chunks of the population that feel they’re not getting their fair shake. The millennials haven’t been included in the employment boom the U.S. is experiencing. Almost a third of the 18-34 cohort is still living at home with mom and/or dad. Everyone laughs when you get to that part of the presentation because here in Canada, we’re seeing this too. You also have the people who got pushed out of the job market in the great recession and never got back in again and they’re not very happy either. You put this together with other things that are going on in the U.S., and protectionism appeals.

The way I answer is to say ‘We’ve seen this all before.’ When 2009 happened, even some of the greatest beneficiaries of globalization were coming out with protectionist pronouncements. But they didn’t have teeth and I’m sure what happened is that the multinationals got a hold of them and told them how supply chains work and told them this kind of policy would cause layoffs in the U.S. Very quickly those policies were altered significantly. I believe there’s a great gulf between rhetoric and reality. And when reality actually bites the new president on Day 1 of the mandate, there will be some serious reconsideration of the rhetoric.

What were oil and gas and mining sector business people saying?

They were saying it’s carnage time, and rationalization time, and they don’t know if they’ll hang on to their jobs. The message I shared with them is that it always seems worse at this point because the price has plunged and this is the moment when the companies say the sky is falling. It always seems worst at this moment, because companies are slashing, and they want to get suppliers around the table to work out a better deal. Through this process, they’re discovering they can process and ship their mineral fuels or their refined product at a much lower cost base than they were able to do before. Even they are seeing that there are possibilities. I don’t want to understate the duress they’re under. But even they are saying they’re in the process of rationalization and it’s tough, but they’re in it, and it’s already paying off.

On the other hand, other sectors are saying they’re trying to figure out how to accommodate the growth they’re seeing — whether it’s the seafood people out east, the auto sector, aerospace sector, whether it’s the consumer products sector. Forestry is feeding the machine of the U.S. house-building bonanza. They loved hearing that there’s still more growth to be had out there.

Were there products and services that you identified as being needed and that EDC could provide?

I made four points in my presentations:

  1. There’s lots of volatility and it’s not going away.
  2. There’s a lot of growth out there and it’s not going away.
  3. The volatility and the growth are the twin sisters of this new growth cycle. They go hand in hand. So what does that mean? Growth is the reason for the withdrawal of the liquidity. Therefore, growth is the trigger for the volatility that we are now living through. That means that standard leading indicators we’ve depended on for decades, if not longer, are going in the opposite direction. Stock markets are going down; that usually means the economy is going down. Not this time. Copper prices are going down. Leading indicators are giving the wrong signal at the moment. There are other leading indicators that are arguing with those leading indicators. The purchase of durable goods inside the U.S. is going up, the U.S. housing market is going up. There’s a clash of leading indicators. I’m siding with the ones that show us where the growth is.
  4. The final point is where is Canada in all of this? We give our forecast but the point that we’re making is if this cycle is unique in that growth and volatility go together, your objective is to run toward the growth and to manage the volatility.

And guess what? EDC is a perfect organization to help you to manage that volatility. People laugh at that, but it’s true. We have accounts receivable insurance. That means that inside this volatile market, if we underwrite this because it’s a good business decision, you can sleep at night knowing you’re going to get paid. What about financial institutions? Maybe they’re not sleeping at night. We’ve got an export guarantee program that can help them to rest easy. They understand they’ll get paid at the end of the day if this is part of the construct. They’re covered, you’re covered, everyone’s happy. Then I say ‘If you’ve got foreign operations in a volatile market, we can finance those, we can underwrite political risk so if any of the big three things that happen in a political disturbance, you’re covered. And, by the way, we can also finance a foreign company if you have a chance of getting into their supply chain.

Towards the end of my tour, I started saying: ‘Do you understand what I just said to you? Everyone is saying the house is burning. We’re saying we’re not sure that house is burning and we’ll sell you a policy [against that]. Everyone is running away from that space. This is an insurance company in the middle of all of this, saying that we’ll sell you a policy.’

One of the things I noticed about this tour, compared to all the others I’ve been on, was that they didn’t come flocking to me as much as usual. Instead, they went to our business-development people. In general, the word from them was that they had more leads than usual to follow up on.

Anything else that was on people’s minds?

China was a big question on people’s minds. There’s a lot of fearful bubble-like stories so I had to deal with that question quite a bit.

So summing up, the main issues of concern were the dollar, China, the U.S. and Brexit?

The order of appearance were the U.S. election, Brexit, the dollar and then China and a bunch of others — Brazil and Russia, for example. We have some significant business in those countries. And then there’s the question of general mayhem in the economy.

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