Economist: fraught relations, but deepening economic ties

Despite diplomatic relations that are still fraught with difficulty, trade relations between Canada and China have continued to grow, according to an economist from the Royal Bank of Canada (RBC).

"We can see exports of Canadian goods to China has declined marginally in 2022, but the stuff that Canada imported from China as a share of total imports from the world is actually as high as a record high. That's really interesting," said Claire Fan, an RBC economist who recently addressed a group of Chinese Canadian media on the Canadian macro-economic outlook and trade relations with China.

Fan said that although Trump era geopolitical tensions and the pandemic had severely disrupted the global supply chain and trade system, the period was basically a black swan event of uncertainty, and that talks have largely continued to the present day.

"But moving forward, businesses are obviously aware of high amounts of uncertainties that are associated with political tension. So, businesses will shelter themselves to make sure that the risks were essential," Fan added.

Meanwhile, according to a recent Canada-China trade report released by the University of Alberta, last year saw a return to growth in both exports and imports between the two countries. Because of the turbulence in exports and consistent growth in imports, Canada’s trade deficit (exports-imports) with China continued to grow.

In particular, exports to China expanded dramatically in the last few months of 2022. The rebound of exports can largely be explained by the easing of COVID-related policies in China, and the country’s lifting of export restrictions on Canadian canola.

Furthermore, statistics shows that Canada imports from China in 2022 grew once again, at a rate of 16.36 percent compared to 2021. The year 2022 also marked the first time that imports from China surpassed C$100 billion, with the total value of imports at C$100.03 billion.

In line with previous years, Telephone and Communication Technology was the top import product category of 2022, with a total value of C$9.83 billion and a moderate growth rate of 7.5 percent YoY. Automatic Data Processing Machines were the second largest import category, with a total value of C$8.07 billion (-0.3 percent YoY), according to the report.

The report concluded that broad relations between China and Canada had chilled throughout 2022, which will unquestionably have some impact on the complexity of future trading and investment relations.

"It is important to note, however, that through this turbulence, Canada-China trade has continued to grow to historic levels and this growth is expected to continue into 2023," read the report.

On the other hand, RBC has also predicted that a recession will hit at the midpoint of 2023. Fan noted that the bank’s earlier expectation of mild recessions in Canada and the US hasn’t changed and is driven by several factors, such as inflation that is more persistent than expected, rapid interest rate hikes as a response from central banks, and a slower consumer spending profile.

"Our forecasts see a slowing in economic growth here in Canada through 2023, led by slower household consumption as more consumers are constrained by higher prices and rising expenses to service existing borrowings," said Fan. "We’re already seeing indications that growth in the economy is losing steam. That includes weakness in the labour markets as job openings decline, and rising consumer delinquency."

Since Canada central banks have raised interest rates aggressively to get inflation under control, and rate cuts aren’t expected until early next year, the Bank of Canada has paused its tightening cycle, but could restart it if growth and inflation are more resilient than expected,

Demand for goods is slowing, Fan said, with the broader impact of rate hikes building in 2023, as average debt servicing costs rise. Labour market conditions will deteriorate over the short term as unemployment rates rise slightly from multi-decade, historic lows. But the labour shortage will return, and is likely to persist for a decade, due to an ageing population.

Regarding Canada’s housing market, which has been heavily affected by interest rates, there are early signs that activities are rebounding faster than previously expected, despite the still-atrocious levels of affordability that are driven by higher interest rates. This will add another layer of uncertainty to the projection for a slowing economy in the quarters ahead, according to Fan.