There is no talking about Canada’s economy without revealing just how closely the country’s fortunes are tied to the US.
At the end of 2014, Deputy Governor Timothy Lane of the Bank of Canada delivered a trenchant speech at Carleton University in Ottawa that made this interdependence very clear when he said, “We are more than neighbours, perhaps we are more like fourth-year roommates. The financial crisis of 2008-09 reminded us how tightly linked [the two economies] are, for better or for worse.”
But Lane’s address also made clear that Canada had its own story to tell, one that is often overheard in the US-centric North American media landscape. Part success story, part economic riddle, it’s probably less dramatic than the tale of the United States’ fall and subsequent resurgence, but equally complex – especially due to Canada’s dependence on natural resources.
“Here in Canada, we didn’t have a homegrown financial crash … no banks had to be rescued and house prices didn’t plunge,” he said. “Nevertheless, the recession in Canada was painful. This was mainly because our exports collapsed. It’s not just that about three-quarters of our exports go to the United States, but also that they are linked to sectors of the US economy, such as housing and business investment, that fared particularly badly in the recession.”
As a opposed to the US, Canada managed to bounce back quickly from the first GFC shock, fuelled by a strong resources market that helped boost disposable income, employment, engineering investment and government revenue. But the relief didn’t last long.
“As Canada’s recovery unfolded, our economy became increasingly unbalanced,” Lane explained during his revealing speech in Ottawa.
“Our non-energy exports, after picking up quickly, stalled well below their pre-recession level. Economic growth became increasingly reliant on building more and more homes, mortgaged at rock-bottom interest rates and driving up the indebtedness of Canadians to unprecedented levels. That source of growth was increasingly tapped out. And it built up vulnerabilities in our financial system, which could spell trouble down the road.”
Fast forward to 2014-15, and the next challenge will be kick-starting a gradual renormalisation process so that markets readjust smoothly as the US monetary policy is brought back to normal.
According to Lane, it’s a complicated process and there is an “important risk” that there will be some bumps along the way. “We will balance the risks of acting too soon and stifling burgeoning economic growth against the risks of acting too late and letting inflation overshoot and fuelling imbalances in our housing markets,” he explained during his end of year address.
Lane’s commitment to renormalise the market could also be good news for the Canadian trucking community, which is still held back by mounting household debt and tight capacities – a result of the quiet post-GFC phase.
In fact, the sector has been under pressure since 2006, when a rise in the Canadian dollar choked off southbound demand that had been growing for 20 years. The industry then moved into ‘unchartered waters’ in 2008 when the financial collapse caused a 30 per cent reduction in volumes, forcing many drivers to flee their rigs as businesses struggled to survive.
Fast-forward half a decade and the industry is set for a much needed confidence boost. The Canadian industry generally tracks the economy, so the outlook this year is for “modest choppy growth,” David Bradley, President of the Canadian Trucking Alliance, confirmed in a November interview with the local CTV network.
Representing transport businesses, owner-operators and industry suppliers, he said the industry was “probably 90 to 95 per cent” back from its low point, with some parts of the country and customers doing better than others. “Increases in volumes have been modest but sustainable and I think that people are generally optimistic. People have long memories and it wasn’t too long ago that we were in a multi-year great recession.”
In line with that, analyst Walter Spracklin of RBC Capital Markets recently raised his estimates for Canadian trucking companies on evidence pointing to improved industry fundamentals. “We believe the industry is approaching an inflection point where demand (via higher volumes) is beginning to overtake supply, affording carriers greater pricing power that should translate into improved financial results going forward,” he wrote in a report.
Until then, the country’s trucking industry will see a choppy transition phase as growth still has to shift back to Canadian businesses from household spending, which is closely linked to business confidence.
Meanwhile, the Canadian Transport Ministry has commissioned a Review of the Canada Transportation Act (CTA), which set to conclude in December 2015 and could help the local trucking industry regain the poise to invest again.
The Honourable David L. Emerson P.C, who is tasked with chairing the Review committee, is well aware of the importance of transport for the Canadian nation. “Transportation has played a defining role in shaping the pattern of Canadian settlement, demography and way of life since before Confederation,” he says.
“In a rapidly changing economic environment where global supply chains, technology and market conditions are constantly evolving, the CTA Review [therefore] provides an opportunity to consider how Canada’s transportation system can best support Canada’s future growth and prosperity.”
Taking a less US-centric perspective than Deputy Governor Lane, Emerson says the Review is timely to consider the role of transportation as a developmental catalyst for the Canadian nation, particularly for the massive, varied and remote geography that comprises northern Canada. But he doesn’t deny the fact that commercial transport has to be seen in a global context, especially for a trade-reliant nation like Canada, with its population spread over a vast landscape.
“Canada’s transportation sector is profoundly influenced by global trends. For example, while the United States remains Canada’s largest trading partner, emerging economic powers such as Brazil, China, and India are driving competition and redefining business models that require restructuring of global supply chain strategies,” he explains.
“Emerging economies are creating greater demand for raw materials and energy, and are altering traditional international transportation patterns. Complicating all this is the recent, but significant, resurgence of the US and Mexico in terms of global manufacturing. Will we be back to the future?”
While Emerson does hint that innovation could be key to future-proofing the $66 billion transport market, current statistics show that there is much work left to do. For example, productivity levels are still a concern: the Conference Board of Canada’s International Ranking of Labour Productivity Growth, current as of March 2013, notes that Canada’s productivity is negatively affected by, “weaker inward and outward foreign direct investment, low R&D intensity, a weak innovation record, and the relatively small percentage of Canadians with advanced degrees in science and technology.”
According to Emerson and the Review committee, those shortcomings could place a burden on the local transport industry and slow down much needed evolutionary processes that go beyond the current shortage in business confidence.
Already, there is a notable shift freight movement across the nation that will put the industry’s inventiveness to the test. Emerson’s team found that the manufacturing sector’s share of total exports by value has declined from 57 per cent to 48 per cent between 2003 and 2013, while exports of crude petroleum, iron ore, grain and forestry products have significantly increased. Over the same period, Canada’s imports of manufactured goods from overseas have nearly doubled, while manufactured imports from the US have remained relatively constant.
The resulting pressure on logistics processes is already palpable today, with trailing equipment becoming increasingly sophisticated. “We’re starting to see highly-spec’d trailers, not just selling boxes on wheels,” Trailers Canada’s parting President Conny Weyers told Truck News’ James Menzies in November. “People are looking at floors, wheels, tyres, disc brakes, lighting systems, air deflection systems. We have seen a definite change in attitude over the last few years. We’ve seen a lot of buying taken away from the accounting people – it’s back to the owner and the shop people and the people who know what they need.”
In addition, Canada is at the forefront of the Performance Based Standards (PBS) movement which is also making inroads in Scandinavia, South Africa and Australia, where advanced Long Combination Vehicles (LCV) are used to achieve more payload without compromising on road safety. According to Transport Canada, the federal-provincial-territorial memorandum that defines Canada’s nationally accepted trucks has already been updated three times, introducing, among other things, an exemption for a ‘boat tail’ aerodynamic device up to two feet long (when measuring the length of a truck), an exemption for an auxiliary power unit (when measuring the weight of a truck), and an increase in the maximum weight permitted on a wide-base single tyre to match US levels.
In line with that development, the adoption rate of GPS systems in road transport is on the rise. According to Emerson’s CTA Review manuscript, 27 per cent of Canadian trucking businesses have been using “advanced communication technologies” in 2012 – up 3.6 per cent on 2009.
But competition is fierce, with rail nearly doubling the usage of high tech tracking technology over the same period of time, from 14.5 to 27.7 per cent. While that growth can partly be explained with increased global demand for commodities, which has increased the demand for bulk shipment by rail, it does put pressure on trucking to be more efficient and flexible to provide a viable alternative to rail, or link into the system with a more intermodal approach.
According to Emerson’s report, the outcome of the race between road and rail will also depend on the Government’s future investment plans, which currently seem incoherent. “Although some federal infrastructure programs have targeted the most important infrastructure for trade and travel flows, Canada has no unifying policy framework from which national priorities can be established across transportation modes.”
Again, the trucking industry will be left in limbo until the big picture scenario unfolds; but that doesn’t mean it has to sit idle. While global supply chains and transportation networks are constantly evolving to reduce the costs and friction of transportation, Canada is geographically well-positioned to serve as a hub for trade and travel between a number of rapidly growing markets in North America, Asia and Latin America – releasing new growth potential for savvy transport businesses.
In keeping with Timothy Lane’s observation, the United States will play a key role in that context. Despite the recent downturn in the North American automotive sector, Canada-US trade in manufactured goods remains an important part of Canada’s economy.
According to Emerson et al, the majority of this trade moves by truck across international bridges in Windsor, Sarnia and the Niagara Falls region of Ontario, with the Windsor-Detroit crossing accounting for nearly half the total traffic.
A new bridge is now being constructed at Windsor, led by the Government of Canada, to reinforce capacity for the movement of goods between Central Canada and the US and potentially provide new growth opportunities for the local trucking industry.
It might not be the watershed event the trucking community has been waiting for, but just like Lane formulated at the end of last year, “It’s another step away from the dark days of the Great Recession and an affirmation that the hard work of economic reconstruction over the last six years is taking hold.”