Weakness in Non-Commodity Exports: Demand versus Supply Factors

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We use the Terms-of-Trade Economic Model (ToTEM) to conduct demand- and supply-driven simulations, both of which deliver weakness in Canadian non-commodity exports relative to foreign activity in line with recent data. We then compare the predictions of the simulations with observed outcomes to shed light on the source of weakness in non-commodity exports. Our results suggest that demand factors, such as competitiveness challenges, likely play a dominant role in explaining the recent weakness in non-commodity exports. The simulations also reveal that a monetary policy response is required, independent of the source of the weakness in non-commodity exports.