Canada’s exporters, still struggling to rebound from the collapse of trade during the recession, are now being hit by the faltering recovery in the United States.
Flagging demand from Canada’s largest trading partner sent exports down in July, leading to the biggest trade deficit on record, a $2.7 billion shortfall. Exports to the United States fell 2.2 per cent, driving down overall exports by 0.7 per cent.
Trade was already the main drag on Canada’s economic growth in the second quarter, and anxious U.S. consumers and fading government stimulus suggest that will continue through the second half of the year. Some 70 per cent of Canadian goods are destined for the U.S. market, and two months in a row of falling exports are sure to chip away at Canada’s economic growth.
Greg Wight, who runs Canada’s largest domestic fleet of vessels on the Great Lakes-St. Lawrence Waterway, has been an eyewitness to the slowdown in U.S. demand.
Iron ore shipments to U.S. steel mills were strong at the start of the year, but tapered off over the summer. Gypsum – used in the U.S. construction market for drywall – “is still down significantly and we’re not seeing any signs it will improve in 2010,” said the chief executive officer of St. Catharines, Ont.-based Algoma Central Corp.
On the bright side, grain shipments have picked up as Canadian suppliers fill the void left by curtailed shipments of Russian wheat. But he characterizes the current activity as “lacklustre.”
The trade deficit was greater than virtually any economist had anticipated, and “the extent of the deepening over a short period of time is a worry,” said Peter Hall, chief economist at Export Development Canada.
Weak consumer confidence, debt woes and the ending of government stimulus mean he doesn’t see much of a pickup in trade until the middle of next year. “The best exporters can hope for out of this, barring significant increases in market share, is that they’re in a holding pattern. It’s unfortunate – and a guy like me doesn’t like saying it, given that trade is my bailiwick – but that’s where the world is at.”
The Statistics Canada report landed a day after the Bank of Canada said the country’s second-quarter growth was weaker than it had projected, and that there is “unusual uncertainty” around the economic outlook.
Now, some economists think the central bank is being too buoyant about its third-quarter reading as well. Jonathan Basile, New York-based vice-president of economics at Credit Suisse, recently downgraded his quarterly estimate for Canada’s growth to 2 per cent annualized because of U.S. weakness, and thinks the Bank of Canada’s 2.8-per-cent projection is too optimistic.
“It’s possible they’re underestimating the slowdown,” he said.
Thursday’s trade numbers weren’t all doom and gloom. Domestic demand remains sturdy, with imports jumping 2 per cent on higher crude petroleum and car shipments.
Machinery imports rose for the sixth month in a row, led by communications equipment, a welcome sign that businesses are investing in productivity-enhancing equipment after the recession caused business investment to dry up.
The global picture, though, is deteriorating. The recovery looks to be slowing more than expected as growth weakens in rich economies, and stimulus should be extended or stepped up if the slowdown endures, the Organization for Economic Co-operation and Development said Thursday. It forecast growth across the G7 group of major economies to average just 1.4 per cent annualized in the third quarter and 1 per cent in the fourth.
“We’re seeing a slowdown in the recovery which is more or less generalized,” OECD chief economist Pier Carlo Padoan told Reuters, although he sees no evidence of a relapse into recession in any major economy at the moment.
In Canada, the trade report comes as the economy is cooling in key areas such as housing. Details on the health of the labour market will land Friday when Statscan releases its labour force survey for August.
With a file from Reuters
______
TRADE AT A GLANCE
Rising imports and a drop in exports, particularly to the U.S., caused Canada’s trade deficit to hit a record $2.7-billion in July. Here’s a snapshot of what was traded:
EXPORTS
Machinery
Machinery and equipment exports shed 1.9 per cent to $6.4-billion after three months of growth. Aircraft, engines and parts led the drop, while industrial machinery such as gas turbines also fell.
Consumer goods
Consumer goods exports hit a decade low, tumbling 7.3 per cent to $1.3-billion. About 90 per cent of that drop was due to lower exports of medicinal and pharmaceutical products.
Forestry products
Exports of forestry products fell 5.3 per cent to $1.8-billion, following 10 successive months of growth. Lumber exports sank 18.7 per cent.
Precious metals
One of the few areas that grew. A 37.2-per-cent jump in precious metals and higher exports of other non-metallic minerals meant industrial goods and materials exports climbed 2.3 per cent to $7.5-billion.
IMPORTS
Energy
Energy products imports rose 11.9 per cent to $3.3-billion on higher volumes and prices. Crude petroleum imports led the gains, and so did aviation fuel and metallurgical coke.
Autos
Imports of auto products increased 2.9 per cent to $6.2-billion as volumes rose. Passenger car imports rose 9.1 per cent – the third consecutive monthly gain.
Machinery
Machinery and equipment imports rose 1.3 per cent to $9.8-billion as volumes gained for a sixth month. Widespread advances in this sector were led by communications and related equipment.
Industrial goods
Imports of industrial goods and materials fell 3.1 per cent to $7.3-billion after two months of increases. Precious metals and organic chemicals led the decline in the sector.
Source: Statistics Canada
