Canada’s trade deficit narrowed slightly in September, but falling exports and imports bear the marks of a damaged global trade and investment environment.
Statistics Canada’s monthly merchandise trade report, released Tuesday, pegged the monthly deficit at $978-million, down from a revised $1.2-billion in August. But the improvement came amid slumping trade demand, as a 1.3-per-cent month-to-month drop in exports was exceeded by an even deeper 1.7-per-cent decline in imports.
On a volume basis, which excludes the impact of price changes, exports slumped 2.1 per cent while imports were down 1.6 per cent.
After a strong first half of the year, exports stumbled in the third quarter as the global slowdown in trade, manufacturing and business investment stemming from the U.S.-China trade war increasingly weighed on Canada’s trade flows. Statscan said exports fell 2.3 per cent quarter over quarter, while imports slipped off 0.6 per cent.
“The volume level of exports fell back to where it was in March, which wipes out the summertime gains,” Bank of Nova Scotia economist Derek Holt said.
U.S. trade data, released at the same time as the Canadian report, showed that Canada’s biggest trading partner is feeling the effects of the continuing trade feud with China, which deepened in September with the expansion of the tariffs the two sides have imposed on each other. The U.S. trade deficit narrowed to US$52.5-billion from US$55-billion in August, but, like Canada’s deficit, the decline came amid a significant drop in two-way trade. Exports fell 0.9 per cent while imports dropped 1.7 per cent. Two-way trade between the U.S. and China slumped nearly 6 per cent.
Economists said the weakened trade environment is weighing on the overall Canadian economy, contributing to much slower growth in the second half of the year. Scotiabank said that with the September trade report, the economic data to date put real gross domestic product on track for zero growth in September, and a tepid 1.3-per-cent annualized pace for the third quarter as a whole. That quarterly rate is in line with the lowered estimate that the Bank of Canada issued in its quarterly Monetary Policy Report last week.
Canada’s September exports were weakened by some temporary factors, including production disruptions at East Coast offshore oil facilities and the General Motors strike, as well as unusually rainy conditions that hampered grain harvests and resulted in sharp declines in shipments. Still, economists noted that the slowdown was broad-based, with seven of 11 export sectors posting declines.
They also noted that both the import and export figures show stalled demand for industrial machinery and equipment – evidence of sputtering business investment, which has been one of the biggest consequences of the deep and nagging global trade uncertainties. Canada’s exports of machinery and equipment have fallen in three of the past four months, reflecting a slowdown in U.S. industrial demand as the trade war has dragged on.
A quarterly survey of U.S. business by the Federal Reserve, released Monday, showed fading demand for commercial and industrial loans – suggesting that U.S. business investment continues to struggle in the fourth quarter.
“Unfortunately, demand for Canadian exports remains clouded by trade uncertainty and the recent contraction in U.S. manufacturing activity,” Toronto-Dominion Bank economist Omar Abdelrahman said in a research note.
But economists expressed guarded optimism that China and the United States are close to an agreement to de-escalate their trade hostilities, and lift at least some of the cloud cover hanging over global trade and investment. The two sides have been working on what the U.S. administration has termed a “phase one” deal aimed for mid-November. Such a deal would reportedly avert additional U.S. tariffs on Chinese goods that are scheduled to begin in mid-December, and may also include reductions in some existing tariffs in exchange for Chinese commitments to increase U.S. agricultural purchases. However, reports this week suggest China wants the U.S. to roll back the tariffs it imposed in September before it agrees to sign a formal deal.
“It is unclear if this will derail this attempt at a deal, as the U.S. wants to maintain leverage for future talks,” TD economist Sri Thanabalasingam said in a research note. “Nevertheless, there seems to be a bit more optimism in the air.”