Canada’s perennially disappointing exports could force Bank of Canada Governor Stephen Poloz to cut rates again this year, according to the economics team at Nomura. 

“The continued underperformance of Canadian exports is putting in doubt the BoC’s forecast that growth will improve in the second half of 2016,” Nomura economist Charles St-Arnaud wrote in a report titled The BoC’s major exports headache. 

St-Arnaud argues the probability of the Bank of Canada cutting rates this year is approximately 40 per cent, and that those odds could rise if shipments continue to disappoint.   

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Poloz has long counted on non-energy exports to help lift the economy out of its morass. However, even as recently as last week, the data hasn’t worked in his favour. Canada’s trade deficit swelled to a record $10.7 billion in the second quarter as exports plunged the most since 2009. 

While many observers expect Canada can hitch its ride to a resurgent U.S. economy, St-Arnaud said it’s not quite so simple.

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Bank of Canada Governor Stephen Poloz

“The sensitivity of Canadian exports to U.S. demand has diminished in the past decade,” he wrote in the report. While Nomura expects U.S. imports will rise six per cent in the third quarter, St-Arnaud pointed out Canada is losing its competitive edge as unit labour costs rise, allowing Mexico and Asian countries to grow their share of the market. 

One thing that could help this country’s exporters is an even cheaper currency, but Canadian dollar depreciation “is no free lunch,” according to St-Arnaud.  He argues a weaker loonie will hamper Canada’s overall terms of trade and it’s also unlikely to incite significant investment in the country. 

Although Nomura’s St-Arnaud sees a greater probability of a rate cut this year, he cautions Poloz faces a catch-22. 

“The BoC should be worried if it reignites household borrowing and the housing market, while business investment is currently not very sensitive to rate cuts.”