Canada’s weak economy and exports | low oil prices not the only cause

Canada put up its worst quarter for growth in over 7 years Wednesday, declining at an annualized rate of -1.6%. While the second quarter contraction of -0.4%looks less scary, the devil, as usual, is in the details of the latest Statistics Canada report.

StatsCanada reported,
“Excluding the impact of the large decline in crude petroleum output, which was due to continued weakness in the energy sector and the wildfire in Fort McMurray, real GDP grew 0.1%.”

Canada’s economy is flat-lining and oil can no longer be blamed as the sole reason for the increasing weakness.

Falling Exports hurt Canada’s Economy

Canada’s declining real GDP can be blamed on one thing: exports. Canadian exports of goods and services dropped by 4.5% in the second quarter. This is a stunning reversal from the 1.9% increase in the first quarter. Few countries around the world are more dependent on exports than the resource-rich nation of Canada.

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Again, while Canada is a huge net exporter of energy (accounting for 16% of total exports) we used to rely on a strong manufacturing sector. According to Trading Economics, Canada also exports motor vehicles and parts (16%), consumer goods (13%), metal and non-metallic mineral products (11%), forestry products (7.5%), basic and industrial chemical, plastics and rubber products (7%) industrial machinery (6%). So, while energy is a massive part of the Canadian economy, it cannot be solely blamed for the crash in exports.

Canada’s trade deficit hit an all-time record $11.3 billion as exports of Canadian-made goods collapsed in Q2.

“Motor vehicles and parts were down 5.8%, mostly because of lower exports of passenger cars and light trucks (-6.6%). Exports of consumer goods (-6.8%) decreased across the board, resulting in the largest drop since the second quarter of 2003.”



Foreign trade and exports are responsible for roughly 45% of Canada’s GDP. The Canadian economy is dependent upon foreign trade, particularly with the United States, which is by far our largest trading partner.

Check out these two facts:

  • “Canada and the United States are the world’s largest trading partners: more than US$670 billion in goods and services were traded in 2015.
  • The United States is the most important destination for Canadian direct investment abroad, which totalled $448 billion (stock) in the U.S. in 2015.”



The decline of the U.S., not just Canada, can be seen in the weak Q2 numbers. It is becoming painfully clear, that Canada and the U.S. are entering recession together.

Canada’s GDP has been edging lower for decades:

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A Weaker Canadian Dollar?

CIBC economist Andrew Grantham, pointed straight to the need for a weaker Canadian dollar, stating,

“The ongoing current account deficit and specifically the recent softness in goods exports, even outside of oil prices, is a further indication that we need the Canadian dollar to stay at current or even slightly weaker levels to aid the rotation in the economy.”



Canadian Dollar vs. U.S. Dollar

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The U.S. is in or close to being in a recession. With growth near 1% and inflation above 1% real rates have been negative for some time.

U.S. trade facts:

Canada and the U.S. exchanged approximately $2.4 billion in goods and services every day in 2015. In fact, according to StatsCanada, Canada is the top export destination for 35 states.

The foundation of Canadian economy is trading with the United States. As both countries lose high-paying manufacturing jobs, trade deficits will continue to rise. This is especially true with respect to the Canadian Loonie.

Meanwhile, Canada’s foreign direct investment picked up to $14.4 billion in inflows, with investors buying some $38 billion in Canadian stocks and bonds, one of the best quarters on record.


While a weak currency has drawn investment to Canada from abroad, as can be seen in hot real estate markets across the nation, it has failed to transfer to increased demand for Canada’s manufacturing goods, just yet. To conclude, the weak price of oil has hurt the Canadian export market; however, the problem is much more complex, with the route cause attributed to a weakening U.S. economy.


This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.