Canadian Trade in Services Has Outperformed Trade in Goods During the Global Economic Downturn

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Lydia Gosselin Couture
Office of the Chief Economist
October 2, 2009

Summary

The global economic downturn has severely affected world trade over the past year. Much of the commentary on the impacts of the crisis on trade has focussed on goods trade, which, for Canada, slumped 19.5 percent between the first half of 2008 and the first half of 2009. In contrast, services trade has weathered the crisis better than goods, falling by only 3.2 percent, due in large part to the relatively stable performance of commercial services. Some of the gap in performance between goods trade and services trade is due to a drop in prices for goods trade, most notably for Canadian resource and energy exports. But even taking this into account, services trade outperformed that of goods by a considerable margin. Furthermore, like goods trade, services trade picked up in the second quarter of 2009 driven by an increase in exports possibly signalling a strengthening of global demand.

Change in Total Goods and Services Trade over Previous Quarter

Canada's Seasonally Adjusted Percent Change in Total Goods and Services Trade from 2005 Q1 to 2009 Q2

Total Goods traded started at 2 in 2005 Q1, then began to increase to 3.74 in 2005 Q4 before falling to -2.88 in 2006 Q1. It then began to increase to 3.75 in 2007 Q1 before dropping to 2.16 in 2007 Q4. In 2008 Q1 it was 4.78 and increased to its peak of 6.08 in 2008 Q2, before decreasingly heavily to a low of -15.73 in 2009 Q1 and ending at -8.34 in 2009 Q2. Services traded started at 1.63 in 2005 Q1 and began to decrease to -0.59 in 2006 Q1 before increasing back to a peak of 2.93 in 2007 Q2. Services then began to decrease to a low of -5.04 in 2009 Q1 and then ended at -2.29 in 2009 Q2.

Source: Office of the Chief Economist and Statistics Canada

There are likely two reasons why services trade, and commercial services trade in particular, were less affected by the global economic crisis. Firstly, unlike in services, it is possible to build-up inventories in the goods sector that are run down during a slowdown, which has the effect of accentuating a downturn. Secondly, services may be considered to be less discretionary consumption than goods. For example, in the U.S. market, goods consumption fell by 7.1 percent over the last two quarters of 2008 (the most recent data available), while services consumption actually increased modestly, rising by 0.9 percent.

Background

After peaking in the third quarter of 2008, Canadian goods trade began falling at the end of 2008 and has continued to do so over the first two quarters of 2009, with both exports and imports retracting. Goods trade in the second quarter of 2009 is now 72.5 percent of its level in the third quarter of 2008. For services trade, the contractions started later (beginning only in the first quarter of 2009) and have been less dramatic (services trade in the second quarter of 2009 is now 92.8 percent of its level in the fourth quarter of 2008). Among the three major services categories, commercial services recorded the smallest declines in exports and was the only one to register import growth in the first half of 2009 compared to the same period last year.

Travel and Transportation

Canada's Seasonally Adjusted Percentage Change for Goods Exports, Transportation Receipts, Travel Receipts, and Commercial Services Receipts from 2005 Q1 to 2009 Q2

Using 2005 Q1 as a basis year (100%) and starting at 100 in 2005 Q1, Goods Exports began to increase to 111.42 in 2005 Q4, and then began to decrease to 107.51 in 2006 Q4. After decreasing to 103.70 in 2007 Q4, they began to increase to a peak of 120.29 in 2008Q3 before dropping to a low of 81.64 in 2009 Q2. Transportation Receipts remained somewhat stable increasing to 104.65 in 2005 Q4 and reached 105.86 in 2006 Q4. However, this trend changed as it began to decrease to 98.65 in 2007 Q4 but began to pick back up to hit the peak of 112.63 in 2008 Q3 before dropping to a low of 89.00 in 2009 Q2. Travel Receipts decreased to 96.04 in 2005 Q4 and remained somewhat stable hitting 96.99 in 2007 Q2 before decreasing to a low of 89.23 in 2009 Q2. Commercial Services Receipts increased to 104.65 in 2005 Q4 and continued to keep this trend, increasing to 106.90 and hit a peak of 112.63 in 2008 Q3 before dropping to 104.58 in 2009 Q1 and ending at 106.12 in 2009 Q2.

Source: Office of the Chief Economist and Statistics Canada

In the first half of 2009, travel receipts continued their downward trend that had started long before the 2008 downturn, due in part to the stronger Canadian dollar over the past several years, as both business and personal travel fell. Travel payments, on the other hand, levelled off in 2008 after rising sharply in recent years and only began to fall with the onset of the global economic downturn and possibly concerns related to H1N1, as most of the decline was due to a decline in personal travel as opposed to business travel which was more stable.

Canada's Seasonally Adjusted Percentage Change for Good Imports, Travel Payments, Transportations Payments and Commercial Services Payments from 2005 Q1 to 2009 Q2

Using 2005 Q1 as a basis year (100%) and starting at 100 in 2005 Q1, Goods Imports increased to 111.91 in 2007 Q1, dropped to 107.00 in 2007 Q4, then increased to a peak of 121.28 in 2008 Q3 and dropped down to a low of 94.21 in 2009 Q2. Travel Payments steadily increased to 114.56 in 2006 Q4, and then again to a peak of 136.47 in 2007 Q4. It then began to decrease to 125.72 in 2009 Q2. Transportation Payments increased to 118.18 in 2007 Q2, 125.27 in 2007 Q4, and reached its peak of 133.92 in 2008 Q4, before dropping down to 113.63 in 2009 Q2. Commercial Services Payments remained somewhat stable, increasing to 109.24 in 2007 Q2, and hit its peak of 113.35 in 2008 Q4, before dropping down to 106.08 in 2009 Q2.

Source: Office of the Chief Economist and Statistics Canada

Transportation services are closely linked to goods trade. Since the second quarter of last year, both Canada's transportation receipts and payments have dropped steeply, following a pattern similar to goods trade.

Commercial Services

Commercial services are diverse and cover a wide range of activities, from insurance to culture and recreation, and from equipment rentals to royalties and licensing fees. Total commercial services trade has been comparatively stable, declining by only 0.2 percent between the first half of 2008 and the first half of 2009, as a 2.2 percent decrease in exports was partially offset by a 1.8 percent increase in imports.

Given the source of the global downturn in the financial sector it is not surprising that financial services registered the largest drop among all commercial services subcategories in the first half of 2009. A significant decrease was also recorded in exports of miscellaneous services to business. This subcategory includes activities in industries that were severely affected by the crisis, such as real estate services, equipment rentals, and tooling and other services for the automotive industry. Nevertheless, a rise in exports of communication services in the first two quarters this year over the same period in 2008, complemented by increases in architectural and engineering services and in audio-visual services, limited the drop in overall commercial services exports to 2.2 percent over the period.

Commercial services imports were up 1.8 percent in the first half of 2009. Royalties and license fees recorded the biggest increase among all commercial services subcategories, followed by audio-visual services, management services, and computer and information services. Miscellaneous financial services and miscellaneous services to business registered the largest declines between the first half of 2008 and the first half of 2009; as with exports, it was likely due to strong ties to the financial sector.

Changes in Exports and Imports of Commercial Services by Category
First Half of 2009 over First Half of 2008, Seasonally Adjusted
CategoryExportsImports
Audio-visual services$57,000,000$145,000,000
Other miscellaneous, and other technical services-$174,000,000-$104,000,000
Architectural, engineering, and other technical services$60,000,000$50,000,000
Research and development-$23,000,000-$75,000,000
Management services-$57,000,000$127,000,000
Royalties and license fees-$18,000,000$183,000,000
Computer and information services$2,000,000$90,000,000
Other financial services-$383,000,000-$134,000,000
Insurance services-$22,000,000$26,000,000
Construction services-$19,000,000$56,000,000
Communication services$142,000,000$11,000,000
Total-$437,000,000$375,000,000

In the second quarter of 2009, exports of commercial services have started to rebound, rising 1.5 percent. Most subcategories went up — even in sectors that were severely affected by the economic slowdown, such as construction, miscellaneous financial services, and miscellaneous services to business, possibly suggesting a pickup in economic activity abroad. While total imports of commercial services declined in the second quarter, imports of miscellaneous financial services advanced over the quarter, consistent with improved conditions in financial markets.

Footnotes

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