Canada ran up its largest trade surplus since the Great Recession this summer in the latest sign that exports are once again driving the economy.
The merchandise trade surplus reached $2.6-billion in July, up from a revised $1.8-billion surplus in June, led by surging exports of cars, forest products and machinery, mainly to the United States.
Canada is finally enjoying the benefits of a lower Canadian dollar and its close ties to the rapidly accelerating economy in the U.S. – the destination for roughly three quarters of Canadian exports.
“Export growth is on the move,” agreed Peter Hall, chief economist at Export Development Canada. “The steady, strong growth in the U.S. is paying dividends.”
Export sales rose 1.4 per cent to hit a new record-high of $45.5-billion in July, led by a nearly 10-per-cent jump in autos and parts. More tellingly, nominal export sales are running 16.4 per cent above year-ago levels.
Imports fell 0.3 per cent.
The resulting surplus was the largest since since October, 2008.
Economists said the export rebound could lead to a second straight quarter of greater than 3 per cent economic growth in Canada. Gross domestic product rose 3.1 per cent in the second quarter, with half the gain coming from the improving trade picture.
Royal Bank of Canada, for example, is forecasting 3.3 per cent GDP growth in the third quarter. That is a full percentage point higher than the Bank of Canada’s own forecast.
If sustained, this economic spurt could pose a challenge for Bank of Canada Governor Stephen Poloz. Mr. Poloz has repeatedly warned that persistent economic weakness will likely delay the bank’s efforts to push up its key short-term interest rate to a more normal level. The rate, left unchaged again this week, has been stuck at 1 per cent for four years now – the longest interest rate freeze since the 1950s.
If the economy grows much faster than the central bank now estimates Mr. Poloz could be forced to revise the bank’s forecasts and push forward rate hikes.
Higher rates have several potential downsides for the economy. It could trigger a sharp downturn in the housing sector, cause the Canadian dollar to rise and make businesses less willing to invest.
The big trade numbers’ impact on economic growth “will complicate matters for Governor Poloz,” Bank of Nova Scotia economists Derek Holt and Dov Zigler acknowledged in a research note. They pointed out that Mr. Poloz has consistently dismissed evidence of rising inflation as transitory, while harping on persistent economic weakness.
The Bank of Canada cautioned in its rate announcement this week that while many export industries are doing better, companies are still holding back on adding jobs and making investments. “While an increasing number of export sectors appear to be turning the corner toward recovery, this pick up will need to be sustained before it will translate into higher business investment and hiring,” the bank said.
Like many analysts, Royal Bank of Canada economist Nathan Janzen expects the central bank to move away from its current neutral stance on future rate movements before the end of the year. Most economists don’t expect a rate hike until at least mid-2015.
The export turnaround is particularly evident in trade with the U.S. Exports rose 1.9 per cent in July. That pushed Canada’s trade surplus with the U.S. to $5.1-billion, up from $4.9-billion in June.
Canada had a trade deficit of $2.6-billion with the rest of the world.
The EDC’s Mr. Hall said U.S. business investment is clearly picking up and that’s helping exporters of machinery and equipment.
One cautionary note about the trade numbers is that monthly results are notoriously volatile and subject often to large revisions. Statistics Canada officials have expressed concern recently that a lack of timely oil price and shipment data makes it very difficult to reliably track the monthly energy trade. Recent revisions have wiped out trade surpluses and caused trade deficits to shrink by hundreds of millions of dollars.
Editor's note: Economist Derek Holt was misidentified in an earlier version of this story. The error has been corrected.