Stronger growth in USA to boost Canada's exports and business investments

**Emerging markets target R&D investment to move up the value chain**
**High-tech spotlight illustrates need for developed economies to invest in innovation to remain competitive**

VANCOUVER, March 18, 2014 /CNW/ - A stronger than expected recovery in leading industrialized nations has boosted global trade confidence, but a slowdown in growth in emerging markets in recent years makes for contrasting outlooks around the world. Canada's economy is forecast to gain momentum in 2014 and, more importantly, the composition of growth is expected to rebalance and broaden, according to HSBC's latest Global Connections Trade Forecast.

This edition of the Trade Forecast outlines how stronger business confidence and an increase in demand from the United States will support a much-needed rotation from domestic demand to exports and business investments here in Canada.

HSBC Trade Confidence Index (TCI)
Canada's TCI rose to 115, above its historical average of 111 and matching the level found in the United States, as the number of firms expecting an increase in trade volume reached its highest level since the survey began in early 2010. At the industry level, almost 60% of the wholesale/retail sector and 55% of the manufacturing sector expect greater trade volumes.

By contrast, Canada's export performance has faltered in 2012 and 2013 as a result of weak external demand and a declining export share.

The importance of tech
With emerging markets targeting R&D investment to move up the value chain in the high-tech sector, developed economies will need to innovate to remain competitive. Technology is essential for maintaining and enhancing standards of living, promoting business investment and supporting economic developments.

Key findings from the report

• Canada's innovation levels are under some pressure because business R&D intensity is only about half of that in the US, and the volume of tax credits for innovation is a third of that in the US.
• Growth in Canada's high-tech sector entered a steep downward trend after the 2000 tech bubble. Institutional bottlenecks, a slowdown in private firms listing on the stock exchange, and foreign acquisitions of small promising firms have all contributed to the decline.
• Financing of high-tech investment also remains constrained as investors flock to the mining and resources sector. This may begin to change as commodity prices moderate.

Emerging markets, led by China, are also rapidly growing investment in R&D, enabling them to move up the value chain. According to the latest figures, China spends the equivalent of 1.8% of its annual GDP on R&D, a near doubling of its expenditure 20 years ago.

In Canada, R&D investment has not returned to pre-recession levels and currently sits at 1.7% of GDP - the second lowest in the G7 - compared to a high of 2.09% in 2001, giving Canada ample room to boost our productivity and grow our economy. For the sake of comparison, the OECD average for R&D investment globally is 2.4% of GDP.

If Canada can revive its tech sector, its educated labour force and stable business environment make it well positioned to gain market share in exporting high-tech goods, particularly if Canadian firms can integrate into US supply chains to emerging markets.

Canadian high-tech exports are set to accelerate from 1% growth per year, on average over the past decade, to 6% per year in the medium term. Canada will also import greater volumes of high-tech goods, with growth forecast to accelerate from 5% a year in the past decade to 7% a year in the medium term. This will allow Canada to benefit from foreign R&D advances.

Ben Arber, Head of Global Trade and Receivables Finance, HSBC Bank Canada said: "The example of high-tech presents lessons for other sectors and the future pattern of global trade. The developed economies in which the intellectual property resides still enjoy the lion's share of the spoils, but under-investment in R&D could threaten their competitive advantage, and presents an opportunity for emerging markets to gain ground on them. The world economy is becoming more knowledge-intensive - it is essential for Canada to invest more in research and education to retain competitiveness and enhance future growth."

Short Term Growth
Over half of Canadian respondents (58%) foresee trade volumes to rise in the short term, up from 50% just six months ago. There is a spike in the number of firms attributing the improved outlook to strategies focused on increased business (from 3% to 14%) and product upgrades (from 3% to 9%).

The US is viewed as the most promising region for trade in the short term, with over 50% of respondents citing it as presenting the best business opportunities. But while the US clearly remains the trade corridor of choice for Canada, unfavourable exchange rate conditions were identified by two thirds (65%) of wholesale/retail firms as a constraint on doing business, reflecting the higher cost of imports.

Longer Term Growth
Over the longer term, emerging economies are expected to be the key source of trade growth, as the underlying structural factors for long-run economic growth remain intact. China already accounts for almost a fifth of the total merchandise trade of the countries covered by the Forecast, and this share is expected to rise to above 30% by 2030.

At the sector level, petroleum products, transport equipment, and industrial machinery will be the main contributors to export growth both in the short and medium run. On the import side, industrial machinery, transport equipment, and information and communications technology equipment are expected to be the most critical to Canada.

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For a copy of the Global Connections Trade Forecast report and for further information, log onto http://www.globalconnections.hsbc.com/. An infographic which portrays key findings from the latest trade forecast is also available upon request.

HSBC's Trade Forecast encompasses trade data for 25 countries and territories key to world trade.

Notes to Editors:
About the HSBC Trade Forecast - Modelled by Oxford Economics
Oxford Economics has tailored a unique service for HSBC which forecasts bilateral trade for total exports/imports of goods, based on HSBC's own analysis and forecasts of the world economy to generate a full bilateral set of trade flows for total imports and exports of goods, and balances between 180 pairs of countries.

Oxford Economics employs a global modelling framework that ensures full consistency between all economies, in part driven by trade linkages. The forecasts take into account factors such as the rate of demand growth in the destination market and the exporter's competitiveness. Exports, imports and trade balances are identified, with both historical estimates and forecasts for the periods 2014-16, 2017-20 and 2021-30.   Sectors are classified according to the UN's Standard International Trade Classifications according to the UN's Standard International Trade Classifications (SITC) and grouped into 30 sector headings. More information about the sector modeling can be found on http://www.globalconnections.hsbc.com/

HSBC Trade Confidence Index
The HSBC Trade Confidence Index is conducted by TNS on behalf of HSBC in a total of 23 markets, and is the largest trade confidence survey globally. The current survey comprises six-month views of 5,800 exporters, importers and traders from small and mid-market enterprises on: trade volumes, risk to suppliers, need and access to trade finance, impact of exchange rates and regulation.  The fieldwork for the current survey was conducted between November - December 2013 and gauges sentiment and expectations on trade activity and business growth in the next six months.

HSBC Commercial Banking
For nearly 150 years we have been where the growth is, connecting customers to opportunities. Today, HSBC Commercial Banking serves businesses ranging from small enterprises to large multinationals in almost 60 developed and faster-growing markets around the world. Whether it is working capital, trade finance or payments and cash management solutions, we provide the tools and expertise that businesses need to thrive. With a network covering three quarters of global commerce, we make HSBC the world's leading international trade and business bank. For more information see www.hsbc.com/1/2/business-and-commercial

HSBC Bank Canada
HSBC Bank Canada, a subsidiary of HSBC Holdings plc, is the leading international bank in Canada. With around 6,300 offices in 75 countries and territories and assets of US$2,671bn at 31 December 2013, the HSBC Group is one of the world's largest banking and financial services organisations.

SOURCE: HSBC Bank Canada

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