Canada’s recently worrisome trade performance took a dramatic turn for the better in July, as export volumes came roaring back after months in the doldrums.
Statistics Canada reported that Canada’s merchandise trade deficit shrank to $2.49-billion on a seasonally-adjusted basis in July, the smallest in six months, down from a record $3.97-billion in June. (The June figure was revised from an originally reported $3.63-billion.) The turnaround was the result of a 3.4-per-cent jump in the value of exports, which came despite generally lower prices. Export volumes, a key measure for economists assessing the strength in demand, surged 3.7 per cent – reversing most of their losses of the previous two months.
“After an absolutely horrendous second quarter, merchandise trade started the current quarter on far better footing,” said Bank of Montreal senior economist Benjamin Reitzes in a research note. “[Export] volumes were very encouraging from a growth perspective.”
Economists noted that the export growth was driven by the non-energy segment, considered crucial to Canada’s economic recovery as its energy sector continues to struggle with depressed commodity prices. Non-energy exports surged 4.1 per cent in the month, with nine of 11 industry components showing gains.
“Export gains were widespread both geographically and across product categories, and were led by non-energy products, so this was not a story of a recovery from the second-quarter Alberta fires,” said Canadian Imperial Bank of Commerce chief economist Avery Shenfeld in a research note.
Auto-sector exports jumped 6.2 per cent, aircraft and other transportation-equipment exports were up 9.6 per cent, metal and mineral products surged 9.7 per cent and forest products gained 4.3 per cent. Exports of industrial machinery and equipment gained 6 per cent, evidence that U.S. business investment – considered an important driver of demand for Canadian goods – has picked up again after a pronounced lull earlier this year.
Meanwhile, energy exports were down 0.8 per cent by value, reflecting lower prices, but their volumes were up 3.2 per cent, an indication that the sector is coming back from the Alberta wildfires in the spring that cut deeply into oil production.
On the other side of the trade ledger, imports into Canada fell 0.1 per cent, as volumes fell 1.2 per cent while prices rose. Consumer goods fell 2 per cent to their lowest level in a year, while imports of passenger vehicles and light trucks fell 3.5 per cent to snap a seven-month streak of gains, suggesting that domestic consumer demand may have hit a soft patch in July. Imports of industrial machinery and equipment fell 1.4 per cent, their seventh consecutive monthly decline, underlining the continuing slump in Canadian business investment.
The merchandise trade report is the last major economic indicator before next week’s Bank of Canada interest rate decision, and is an important one for the central bank, which has consistently stressed exports as the key to Canada’s economic recovery. The rebound in exports after a weak second quarter will reinforce the bank’s expectations that the economy will be back on course in the second half of the year.
Still, the July trade numbers represent just a small step in the recovery of a Canadian economy that has struggled for much of this year; the export gains won’t change the widespread expectation that the central bank will keep its key interest rate at its current low, economically stimulative level of 0.5 per cent at next week’s setting.
“The rebound in export volumes in July did not fully retrace earlier weakness, with non-energy exports still below year-ago levels in the month. The gain is nonetheless encouraging, and provides reason for optimism that the expected rebound from what looked like overstated second-quarter weakness is occurring,” wrote Royal Bank of Canada senior economist Nathan Janzen in a research report.
“The outlook – both our own and the Bank of Canada’s – has long hinged on non-energy export growth to help offset a more modest domestic demand backdrop in Canada. So far in 2016, this narrative has been on hold. The July trade data marks a baby step in the right direction,” said Toronto-Dominion Bank senior economist Leslie Preston in a note. “We expect further strides to be taken in the months ahead alongside continued growth south of the border, which should translate into increased demand for Canadian goods.”
U.S. trade report upbeat
The U.S. trade deficit fell more than expected in July as exports rose to their highest level in 10 months, offering further evidence that economic growth picked up early in the third quarter. The Commerce Department said on Friday the trade gap narrowed 11.6 per cent to $39.5-billion (U.S.), declining after three straight months of increases. June’s trade deficit was revised slightly up to $44.7-billion.
Economists polled by Reuters had forecast the trade gap decreasing to $42.7-billion in July after a previously reported $44.5-billion shortfall. When adjusted for inflation, the deficit dropped to $58.3-billion from $64.5-billion in June.
The trade report added to upbeat reports on consumer spending, industrial production and residential construction that have suggested the economy has regained momentum after output increased 1.0 per cent in the first half. Despite July’s increase, exports continue to be hobbled by the residual effects of the dollar’s surge against the currencies of the United States’ main trading partners between June 2014 and December.
Export growth could come under pressure. International Monetary Fund Managing director Christine Lagarde told Reuters this week the IMF would likely downgrade its 2016 global growth forecast because of weak demand, flagging trade and investment.
Exports of goods and services rose 1.9 per cent in July to $186.3-billion, the highest since September 2015. Exports to the European Union dropped 9.5 per cent, with goods shipped to the United Kingdom falling 9.2 per cent.