Canada's trade surplus shrank much more than expected in January, but staying in the black for a second-consecutive month in the face of a rocketing currency suggests exporters are well-positioned to lead a sustained recovery.
The country's surplus with its trading partners narrowed to $116-million during the month, Statistics Canada reported on Thursday, as imports reached their highest level since 2008 and the pace of export growth slowed. While the windfall was far below the $2.6-billion that economists were anticipating, analysts pointed to several encouraging signs that belie the underwhelming headline.
For instance, Canada's surplus with the United States - the country's No. 1 customer - narrowed just slightly, to $3.8-billion from the previous month's $4.3-billion. And while overall exports rose just 0.8 per cent after a 7.9-per-cent gain in December, sales to American companies and consumers grew by 3.3 per cent.
That fact, coupled with surges of about 16 per cent each for automotive imports and exports, points to a strengthening recovery on both sides of the Canada-U.S. border.
"The fact that exports are still growing with the loonie hovering at or above parity is, to me, a really strong indicator of a sustained recovery in that sector," said Francis Fong, a Toronto-Dominion Bank economist. "Anecdotally, it seems a lot of the companies that might have faced problems with a really elevated dollar have fallen out of the market, and the ones that are left are actually well-positioned to weather it."
Overall, imports gained 5.3 per cent after slipping in the last few months of 2010, suggesting that domestic confidence is on the rise as the lofty loonie makes imported goods cheaper for Canadians.
In volume terms, meaning once the impact of price changes is stripped out, imports soared 5.5 per cent in January and exports rose just 1 per cent. Still, economists said a 1.8-per-cent increase in imports of machinery and equipment in January bodes well for continued investment by Canadian businesses - which, along with exports, will be counted on as a crucial plank in driving growth as consumers cut back on spending and the kick from government stimulus fades.
Bank of Canada Governor Mark Carney last week said there is "early evidence" of a recovery in sales abroad, pointing to faster growth in the United States and demand for high-priced Canadian commodities. Nonetheless, he left his main interest rate unchanged at 1 per cent last week despite evidence of a stronger-than-anticipated domestic recovery, hinting at nagging concerns from around the world.
Continued export strength may now depend on how much further upheaval in the Middle East and North Africa pushes oil prices, because even though Canada is a net exporter of energy, other manufacturers could see demand for their goods slow as households and companies are squeezed.
Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said on Thursday that oil prices averaged less than $90 (U.S.) per barrel in January, compared with the $100-plus level in recent weeks. Moreover, the loonie is trading almost 3 cents above the greenback and could soar further, testing foreign markets' tolerance to higher costs for Canadian products.
Economic growth figures from the fourth quarter - including a 17-per-cent annualized gain for exporters - had many analysts convinced that tax cuts and other measures to speed up the U.S. rebound were having a tangible, lasting effect on Canadian fortunes, despite the twin constraints of a strong currency and perceived lack of competitiveness.
Those numbers, reported at the end of February, showed Canada's gross domestic product grew at an annualized 3.3-per-cent rate in the last three months of 2010, accelerating after a 1.8-per-cent expansion in the prior three months.
While most economists predict growth in the current three-month period will come in at a faster annualized rate than in the last, some like Mr. Porter predicted that the fourth quarter's 4.6-percentage-point boost from net exports - the difference between the total value of exports and the value of imports - could be "fully reversed" this time around.
"A rebound in inventories and rising capital spending will have to fill that gap," he said.