Canada's trade economy is continuing to flourish in spite of the strong dollar and shaky U.S. recovery.
Exports and imports rose sharply in May, a sign that the Canadian economy is continuing to bounce back strongly from the recession.
Exports, led by shipments of vehicles and auto parts, jumped $1.7-billion or 5.2 per cent between April and May. Imports rose even more - by $1.9-billion or 5.7 per cent - leaving a $500-million trade deficit for the month. The gap was slightly wider than a revised deficit of $300-million in April.
A trade deficit puts a drag on overall economic growth. But in this case, rising trade is a good sign - an indication that businesses are growing and expanding, economists said.
"Yes, there's been a deterioration of the balance, but that's a reflection of strength in imports and exports," Royal Bank of Canada assistant chief economist Paul Ferley said.
"Demand is fairly strong in Canada."
In the United States the trade picture in May was similar, as climbing imports swamped exports. Exports rose 2.4 per cent to 152.3-billion (U.S.). Imports rose even more, pushing the trade deficit to $42.3-billion - the largest gap in nearly two years.
But unlike Canada, the U.S. trade gap has become chronic, swelled partly by the growing and politically sensitive deficit with China, which grew again in May. The U.S. hasn't run a trade surplus on an annual basis since the 1970s, partly due to a dependence on foreign oil imports.
Canada, by contrast, ran a trade surplus for decades before posting a deficit last year amid the economic crisis. The jump in May exports was the largest since July of last year. The biggest contributor was automotive products, which rose by nearly $1-billion, or 20.8 per cent. Machinery, farm products and fish also posted gains.
Purchases of consumer products drove imports in May, rising 9.3 per cent. Imports of industrial goods, machinery and equipment were also up sharply.
The larger trade deficit obscures an "overwhelmingly positive" picture in Canada, said economist Jimmy Dean of Moody's Economy.com in West Chester, Pa. He pointed out that monthly exports are running at 21 per cent above the trough they hit in May of last year and imports are 17 per cent higher.
And that, he said, suggests investment by businesses is taking over from government spending as the main motor of economic growth.
The downside is that economists had expected trade to move higher. Automotive exports, for example, fell off a cliff in 2009 as car and truck production cratered. The industry has come back, but production remains well below the boom years of 1994-2007, when the industry was producing 15 million to 17 million vehicles a year. Production this year is expected to be roughly 11 million.
The lingering question now is how long trade can continue to be a good-news story.
Canada's dominant trading partner, the United States, has a major unemployment problem to work out and, over the longer term, potentially crippling government deficits. That will make it tough for the U.S., which buys the bulk of what Canada exports, to continue to be the main engine of the economy here.
And so while the situation looked good in May, the rest of the year and beyond may be more challenging, particularly for exporters.
"You are going to see a subpar recovery in the United States … and to some extent that will spill over into Canada," acknowledged Royal Bank's Mr. Ferley.
While Canadian policy makers and business leaders talk about finding new export markets, more than 70 per cent of what Canada sells to the rest of the world still goes to the United States.
WHERE CANADIAN EXPORTS WENT IN MAY
United States: 74 per cent
European Union: 9 per cent
Japan: 2 per cent
Rest of world: 15 per cent
TOP 5 EXPORTS IN MAY
1. Industrial goods and materials ($8.1-billion)
2. Energy products ($7.7-billion)
3. Machinery and equipment ($6.3-billion)
4. Automotive products ($5.4-billion)
5. Agriculture and fishing products ($3-billion)
TOP 5 IMPORTS IN MAY
1. Machinery and equipment ($9.4-billion)
2. Industrial goods and materials ($7.3-billion)
3. Automotive products ($5.9-billion)
4. Consumer goods ($4.8-billion)
5. Energy products ($3.6-billion)
Source: Statistics Canada