Canada’s long-awaited export-led recovery remained elusive in December as the merchandise trade deficit widened to $1.7-billion from $1.5-billion in November – another potential negative for the Canadian dollar.
The higher trade deficit, which took economists by surprise, is the sixth in a row for Canada and the largest in more than a year. The country has now posted a monthly trade surplus just 13 times in the past five years.
November’s trade deficit, which precipitated a sharp drop in the dollar, was worse than previously thought after being revised upward to $1.5-billion from $940-million, Statistics Canada reported Thursday. Statscan blamed the bulk of the revision on an earlier flawed estimate of crude oil shipments, which are notoriously tough to predict.
Economists had expected the deficit to narrow to $650-million in December.
Bad weather in December may have made the numbers worse due to transportation problems, said CIBC World Markets economist Peter Buchanan. “[It is] a disappointing figure nonetheless, which is likely to weigh on the Canadian dollar,” he said.
Toronto-Dominion Bank economist Leslie Preston called the higher deficit a “setback” for Canada’s export sector that is likely to depress GDP growth in the fourth quarter.
Economists estimate that the trade deficit will knock a full percentage point off GDP growth in the fourth quarter.
A 22.6 per cent surge in imports of energy products drove imports to $41.4-billion. Import prices rose 1.6 per cent, while volumes declined 0.4 per cent.
There were signs of an improving trend in exports, which rose 0.9 per cent to $39.7-billion. Volumes grew 0.8 per cent and prices edged up 0.1 per cent. Higher exports of most products were offset by declines in energy products, agriculture plus vehicles and parts.
Exports to the U.S. grew 1.2 per cent in December, widening Canada’s trade surplus with its largest trading partner. But that was overwhelmed by a wider trade deficit with the rest of the world.
For 2013 as a whole, Canada’s total trade deficit narrowed to $9.1-billion from a record $12-billion in 2012.
“The transition to more export-led growth is under way, but it has not been smooth,” the TD’s Ms. Preston said.
In theory, a lower dollar should eventually help exporters. But Bank of Montreal economist Robert Kavcic pointed out that “it takes time for a sudden drop in the exchange rate to work its way through the economy, even as long as a year or two.”
Mr. Kavcic said he still expects the combination of a lower dollar, now at about 90 cents (U.S.), and higher demand from the recovering U.S. to push exports higher in 2014.