An unexpected surge in Canada’s trade deficit is dragging on Canada’s already sluggish economy.
The country’s trade deficit neared a record in September as exports fell, prompting several economists to predict that the sagging trade picture will knock three percentage points off third-quarter growth – a similar magnitude as in the second quarter.
A still-weak U.S. market and a strong Canadian currency curbed demand for Canadian exports such as cars and medicine, contributing to the country’s sluggish economic performance.
Bank of Canada Governor Mark Carney is counting on exports and business investment to drive growth as domestic spending ebbs – though he acknowledges exports will be sensitive to currency movements and external demand.
Prospects look muted. “We would not anticipate much of an improvement in these trade patterns in the next couple of quarters,” said Brian Bethune, chief economist for Canada at IHS Global Insight.
The trade deficit widened to $2.49-billion – close to its July record – from $1.49-billion in August, Statistics Canada said Wednesday. Exports tumbled 1.7 per cent on lower volumes while imports rose 1.2 per cent, and have been relatively flat all year.
Economists at Bank of Montreal and Desjardins Financial say weak trade will carve as much as three percentage points from GDP growth in the third quarter. “With American demand unlikely to pick up noticeably, sizable trade deficits are likely to persist,” said BMO Nesbitt Burns economist Benjamin Reitzes.
Demand has not yet bounced back from the United States, Canada’s largest trading partner and the destination of more than three quarters of exports. Exports to the U.S. fell 3.6 per cent to their lowest level since last November, led by a drop in cars. The surplus with the United States narrowed to $1.6-billion in September from $2.9-billion a month earlier.
Canadian exports to countries other than the U.S., such as Japan, rose 3.6 per cent, the third month in a row of gains.
Sluggish U.S. demand, rather than a stronger loonie, is the chief cause of the export decline, said Stewart Hall, economist at HSBC Securities. That market will remain tepid for years, putting the brakes on aggressive growth for many Canadian exports. “Instead, the key to torquing Canadian GDP will be its ability to move away from its traditional trade patterns and reorient itself toward the higher growth areas found in the Pacific Rim, Latin America and Central America,” he said.
Companies have been diversifying, albeit slowly. The U.S. accounts for 76.3 per cent of exports this year, down from 83.8 per cent in 2005, according to Export Development Canada figures.
September’s exports fell as volumes tumbled 2.2 per cent, while prices rose 0.5 per cent. Exports of auto products fell for the fourth straight month in September, reversing 11 months of growth through to May of this year. Most of the drop was in passenger cars.
Exports of consumer goods fell on lower shipments of medicinal and pharmaceutical products.
Industrial goods and materials exports dropped as precious metals and copper ores reversed month-earlier gains.
Some exports increased; for example, machinery and equipment rose 3.6 per cent, the fifth gain in six months. Aircraft exports represented more than two-thirds of the gain in the sector.
On the imports side, precious metals reach a record. Machinery imports rose for the eighth month – a welcome sign that businesses are investing in productivity-enhancing equipment.
