Weak U.S. investment hampers Canada's non-energy exports
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The Canadian Pacific railyard is pictured in Port Coquitlam, British Columbia February 15, 2015. REUTERS/Ben Nelms
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By Fergal Smith
TORONTO (Reuters) - Weak U.S. business investment has hampered a long-awaited pick-up in growth of Canada's non-energy exports, economists say, while a weaker Canadian dollar has not helped exports as much as expected.
The dollar has fallen 18 percent against its U.S. counterpart since mid-2014, when the price of oil, one of Canada's major exports, began to collapse.
Canada needs higher non-energy exports from consumer goods to industrial machinery to offset the oil price shock and to reduce the onus on the Canadian consumer to keep spending to support the economy. Higher exports could also reduce the economy's reliance on an overheated housing market.
The weaker currency has helped exports, but the loonie recently gained ground against other currencies from markets such as Mexico, limiting the impact.
"Since the depreciation has been even larger in Mexico, more of those (U.S.) imports are going to Mexico rather than Canada," said Nathan Janzen, senior economist at Royal Bank of Canada.
Over the same period since mid-2014, the Mexican peso has lost 29 percent of its value against the U.S. dollar.
"There is also the impact from losing a lot of manufacturing capacity. So we don't have as many exporters to take advantage of a cheap Canadian dollar," said Nick Exarhos, economist at CIBC Capital Markets.
The Bank of Canada has been counting on an uptick in non-energy exports for the economy to meet its growth projections. But the latest trade data for June revealed a drop for those shipments.
"The weak link at this point is really in the sectors that are primarily exposed to business investment, so things like machinery, things like aerospace and railroads, non-automotive transportation equipment," said Michael Dolega, senior economist at TD Bank Group.
U.S. business spending on equipment contracted in the second quarter for a third straight quarter as cheap oil squeezed energy sector profits, forcing companies to cut capital spending, while an inventory drawdown also weighed on growth.
"Because U.S. consumers of our exports are flush with inventories there is not much demand pull right now for more imports from Canada," Exarhos said.
Still, economists expect Canada's non-energy exports to improve.
"Our forecasts assume that U.S. business investment will start to pick up again, even over the second half of this year as the oil and gas disruptions fade and domestic demand continues to grow, so driving the need to increase capacity," said RBC's Janzen.
(Reporting by Fergal Smith; Editing by Leslie Adler)
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