Service sector growth, and rising service exports in particular, could help underpin the Canadian economy and provide some uplift for stocks, suggests CIBC World Markets Inc. in a report published Monday.
Recent economic news has been mostly negative, particularly amid ongoing commodity price weakness, the report notes. As a result, CIBC has cut its world GDP growth projections for 2015 and 2016 to 2.7% and 3.1%, respectively, “making these the two slowest years since the recession,” the CIBC report says.
With overstretched Canadian households, the lack of global growth is troubling, the report notes, “The Bank of Canada is hoping that exports and capital spending outside the energy sector help fill these gaps,” the CIBC says.
Although the natural place to look for export growth is manufacturing, the CIBC report points out, “most Canadians don’t work in mines, farms or factories, but in the service sector.” However, services are often ignored as a potential source of exports, the CIBC report says, because services have not traditionally been seen as particularly exportable.
That is changing. Indeed, the report argues that, in the Internet era, “services can be the endogenous growth driver, since increasingly, they are exportable. Not just in tourism where the customers come to you, but in the likes of advertising, programming, engineering, property development, architecture, and money management, where an employee in Canada can directly serve a client elsewhere.”
Indeed, in a separate article in the same report, CIBC argues that the share of exports generated by services is significantly understated in traditional economic statistics. It reports that Canadian service exports have risen faster than goods exports over the past decade; and, that service exports “are three times less volatile than merchandise trade.”
The primary reason for this relative stability is that trade in services is more diversified, with the U.S. representing just over 50% of Canadian service exports, well below the 75% share for merchandise exports.
The importance of services is set to grow, the CIBC report says, with the advent of the Trans-Pacific Pact (TPP), where the impact “could be very significant.”
“It is not a stretch to suggest that when measured correctly, the value of exports of business services can surpass merchandise exports in the coming decade,” the CIBC reort report concludes.
Looking at current economic conditions, CIBC notes that, measured in U.S. dollars, skilled service labour is already “substantially cheaper” in Canada than it is in the U.S. “Not only will that lend support to Canadian growth, but to the TSX, where a broad range of service companies that serve the U.S. and other markets are paying workers in Canadian dollars but earning revenue in greenbacks,” the CIBC report says.