BMI View: We anticipate a broadly healthy growth rate across the Canadian freight industry over the short and medium term, with rail set to be the outperformer in 2015. Key factors underlining our freight forecasts include the lower oil prices that will reduce fuel costs across the mix, as well as stimulate consumer demand as domestic consumers have more money in their pockets due to cheaper prices at the pumps.
We forecast real GDP growth of 1.5% in 2015, which will mark a trough for Canada's economy. Over the next several years, business investment in machinery and equipment will gradually replace investment in the energy sector. We also believe it will be some time before the weaker exchange rate and stronger US demand will see non-commodity goods exports rise and draw down inventories to an extent that businesses would step up their fixed investment in machinery and equipment, which stymies our Canada freight forecasts somewhat due to the US' place as Canada's top trade partner.
One major development in terms of trade, is the looming prospect of the Trans-Pacific Partnership (TPP), which will have an impact on Canada's freight mix going forward. The US government has asked Canada to open up its agriculture sector if it wants to enter the TPP - a free trade agreement between 12 countries. According to US Under Secretary of State Catherine Novelli, Canada is yet to make the concessions necessary for entry into the deal, specifically in terms of agriculture, reported The Canadian Press. Should New Zealand gain access to dairy markets in Canada, among others, dairy imports to Canada will increase, with the air freight sector poised to benefit.
As ever, Canada's rail freight sector will be affected by the situation in the Canadian oil and gas market due to the scale of production in the country. Our rail freight forecast for 2015 is slightly up on 2014's (2.59% compared to 2.57%), predicated on the fact that we envisage demand for fuel exports remaining strong as US refineries require heavy crude, which is produced in the oil sands, rather than the lighter oil that is retrieved from US shale oil, which once more bodes well for the rail freight industry. Over the medium term, therefore, we anticipate average annual tonnage throughput gains of a steady 2.84% to reach over 208mn tonnes by the end of 2019.
Road is once more the dominant component of the freight mix in Canada due in large part to the country's huge geographical size and its connectivity with key trade partner the US. We also expect infrastructure growth linked to the New Building Canada Plan to generate truck demand and boost road freight growth over the medium term, while a prolonged period of low fuel prices will add to the supportive environment for fleet owners, which will also boost consumer demand as people have more money in their pockets to purchase luxury household items, commonly transported by road.
Meanwhile, Canada's air freight sector will benefit from the country's reliance on imported medicines, however, y-o-y tonnage throughput growth remains somewhat muted (forecast to grow 0.89% in 2015) due to starting from a low base - it is by far the smallest of all of the freight. Increased consumer spending will also support overall consumer electronics demand growth going forward, which is why we forecast the air freight mode to grow slightly higher in 2016 than 2015 as the extra in people's pockets makes a difference.
Key BMI Forecasts
We forecast total road freight volumes will rise by 2.28% y-o-y over 2015 to reach 594,95mn tonnes.
We forecast total rail freight volumes will rise by 2.59% y-o-y over 2015 to reach 186.25mn tonnes.
We forecast total air freight volumes will rise by 0.54% y-o-y over 2015 to reach 505,000 tonnes.
We forecast total trade value to rise by 3.00% y-o-y to reach USD940,360bn.
Top trade partners will be the US, China, the UK, Japan and Mexico.