November 8, 2016 / 4:26 PM / 2 years ago

Structural weakness weighs on Canada exports: central bank

HALIFAX (Reuters) - Structural weaknesses are weighing heavily on the recovery of Canada’s export sector but there is good reason to believe exports should strengthen as the U.S. and global economies gain momentum, a key Bank of Canada official said on Tuesday.

In a speech highlighting how the central bank overestimated Canada’s export recovery, Deputy Governor Lawrence Schembri said the structural export capacity and competitiveness challenges have been more persistent and pronounced than the bank expected.

Schembri said Canadian exports did well following the global financial crisis, when commodity prices recovered, but that performance masked the effects of slowing global trade as well as losses in export capacity and market share.

“The commodity price collapse in 2014 exposed these structural weaknesses, which are now weighing heavily on the recovery of our exports,” Schembri said in prepared remarks.

The Bank of Canada cut interest rates twice in 2015 and has since held borrowing costs steady near historic lows, forced to repeatedly cut its outlook for exports and economic growth. Analysts are divided over whether its next move will be a rate cut or a rate hike, even with the U.S. Federal Reserve expected to increase rates as early as December.

Schembri reiterated the bank’s view that the U.S. economic recovery has been slower than expected, and said a good part of Canada’s slow export recovery is due to weakness in U.S. business and residential investment. The U.S. is Canada’s largest trading partner, taking about 75 percent of its exports.

He said the pervasive weakness in global business investment growth is hard to understand, but “the most compelling explanations are the combination of heightened uncertainty, especially about the profile for demand growth, which has been compounded by political events, and elevated risk aversion on the part of firms coming out of the Great Recession.”

Schembri said Canadian exports have also been weighed by a “troubling increase” in the number of global protectionist measures, including “Buy American” policies, and that while a weaker Canadian dollar has helped, other currencies have weakened more, hampering Canadian competitiveness.

He noted Canada has lost U.S. market share due to relatively weak labor productivity growth and the entry of new exporters.

Still, Schembri said the bank saw significant prospects for the production and export of services, including financial, management, engineering, computer, travel and transportation, which he said will play an increasingly important role for export growth.

Additional reporting by Andrea Hopkins and Leah Schnurr in Ottawa; Editing by Meredith Mazzilli

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