Ontario to Post First Recorded Trade Deficit – Conference Board of Canada

The Conference Board of Canada recently released their Provincial Outlook – Summer 2008 and the outlook for Canada is gloomy. Real GDP is expected to grow by a miniscule 0.8 percent in 2008; only Newfoundland is expected to grow less.

The Conference Board predicts the province will run a trade deficit this year; this would be the first trade deficit experienced by the province since provincial trade records were started in 1981. The deficit, predicted to be 545 million dollars, is largely due to an expected 20 percent decline in exports of automobiles and automobile parts.

Rising oil prices have a threefold impact on the trade deficit as they:

1. Increase the dollar value of oil imports from Alberta and abroad.

2. Increase the value of the Canadian dollar, reducing the competitiveness of Ontario’s exporters.

3. Reduce the sales of the North American big three automakers – each of which have a significant manufacturing presence in Ontario.

It is a shame that provincial trade data does not exist prior to 1981, because it would be interesting to see how Ontario’s balance of trade reacted to the 1979-1980 spike in oil prices. Interestingly the value of the Canadian dollar declined significantly from October 1976 until the late 1980s and stayed flat during the 1979-1980 years. The strong positive correlation between oil prices and the Canadian dollar appears to be a far more recent phenomenon.

Until this decade, Ontario has never had to simultaneously deal with rising oil prices and a rising Canadian dollar. Can the province weather the storm? The Conference Board believes so, predicting a 2.8 percent GDP growth rate for 2009. Perhaps the economy can give a reason for Southern Ontarians to look forward to the future. It won’t come from hockey; pundits are predicting a last-place finish for Toronto’s beloved Maple Leafs.

Mike Moffatt is the Economics Guide for About.com.

One Response to "Ontario to Post First Recorded Trade Deficit – Conference Board of Canada"

  1. Rachel   August 12, 2008 at 9:40 am

    Mike – nice piece. regarding the oil correlation – one reason for the dollar’s decline in the midst of oil surge in the late 70s was that Canada produced even less oil then. An IMF/Bank of Canada paper from 2006 “The Turning Black Tide: Energy prices and the Canadian Dollar” has an interesting analysis of the break point.late 2007 was also another break point – when non-resource sector weakness started to rain on the USD/CAD and oil price march upwards. In part the second breakdown reflects that unlike a country like Norway, Canada’s oil and gas exports are still relatively small compared to its total output – and energy output has actually expanded little in the past 5 years, despite all the investment in the sector.