What if the Data Are Wrong?

We've been closely tracking Canada's export activity not only because the Bank of Canada (BoC) is currently fixated on it, but also because many of our recommendations in the resource sector are dependent upon it. 

To be sure, the BoC hopes to resuscitate Canada's ailing manufacturing industry, while the major players in the resource space are already working toward diversifying their markets, particularly as the US is in the midst of an energy renaissance thanks to the shale boom.

But Canada is a few years away from being able to ship its energy products to emerging Asia. In the meantime, the US is still Canada's largest trading partner by far, so much of the commentary regarding the BoC's expectation that exports will soon drive Canada's economy again necessarily focuses on the US economy.

Although many of the recent data regarding Canada's export activity have been mixed or even downright gloomy, this week economists with CIBC World Markets published an intriguing analysis suggesting that official data may have been understating export activity.

In the most recent issue of Canadian Edge, we unpacked Canada's international merchandise trade data for December, which showed the trade deficit widening to CAD1.7 billion from the prior month's revised deficit of CAD1.5 billion. That number fell significantly short of the consensus forecast, which had called for the deficit to narrow to CAD650 million.

Though exports were up 0.9 percent month over month, imports grew by 1.2 percent from a higher base. Energy products were the main underperformers in the export sector, with their total value declining 4.5 percent sequentially and 0.1 percent year over year.

But even with this disappointing result, energy products still accounted for nearly CAD9 billion, or about 21.5 percent, of total exports for December. Exports of crude oil and crude bitumen were singled out as the pri! mary culprit in the energy space, with exports falling 5 percent, to just under CAD6 billion, on lower volumes.

Interestingly, economists with CIBC World Markets wonder whether Statistics Canada (StatCan), the government agency that tracks and reports most of the country's economic data, may be employing a methodology that's understating Canada's oil trade. They note that the US Census Bureau, the US Energy Information Administration, and Canada's National Energy Board (NEB) all report data that show rising volumes for Canada's energy exports, with the latter agency's data showing a 12 percent rise year to date through October versus the prior-year period.

But instead of relying on US import data for its calculations, StatCan instead aggregates data from Canada's provincial energy departments. As a result, its figures tend to be lower, which meant it reported a rise in export volumes that was about 33 percent lower during the aforementioned period than the one reported by the NEB.

CIBC says that if the NEB's data are indeed correct and had been used instead when calculating export activity, it would have reduced the country's trade deficit by CAD1 billion per month during the fourth quarter. That almost merits an exclamation point, because it means that Canada would have come much closer to a trade surplus during that time. In the fourth quarter, the country's trade deficit averaged CAD1.36 billion, so shaving CAD1 billion from that number would have meant an average monthly trade deficit of just CAD360 million.

If StatCan's methodology is problematic here, then at the very least CIBC does not believe it's affecting other important data, such as the agency's calculation of gross domestic product (GDP). The economists say StatCan's production data are largely in line with those reported by the NEB.

So while Canada's export-oriented manufacturers are still struggling, it's possible that export activity in the country's energy sector has been ! substanti! ally better than what's been reported.