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Report on Business Weak exports lead to Canada’s widest trade deficit in six months

Canada posted its widest trade deficit in six months in November, the latest evidence that the economy lost momentum in the final quarter of 2018.

Statistics Canada reported Tuesday that November’s merchandise trade deficit widened to $2.1-billion from a revised $851-million in October. The deterioration was mainly because of a 2.9-per-cent drop in the value of exports, led by the slumping oil sector, as weak prices and associated production cuts sapped shipments.

But oil wasn’t the only story, as trade showed relatively widespread weakness in the month. Eight of 11 export sectors declined, and while that was partly a result of weaker prices, export volumes were also down 1.8 per cent. Imports were tepid as well, slipping 0.5 per cent, mostly because of lower volumes.

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Economists said the trade report reinforces expectations that Canada’s gross domestic product growth likely slowed in the fourth quarter from its 2-per-cent annualized pace in the third quarter. While net trade was a substantial positive contributor to the third-quarter figure, the deterioration seen in October and November, particularly in exports, suggests trade might have actually subtracted from GDP in the final quarter of the year.

“The decline in real exports isn’t a great first indicator for monthly GDP, suggesting that fourth-quarter growth may have come in closer to 1.5 per cent than 2 per cent,” CIBC senior economist Royce Mendes said in a research report.

Economists said that after an unsustainable surge in the middle of last year, trade has slipped into a sluggish period that may persist for a while, amid continued weakness in the market for Canadian oil and evidence of slowing global export demand in general.

“The situation is likely to get worse before it gets better, as benchmark oil prices continued to slide in December. Looking further ahead, the planned cuts in oil production in Alberta, which took effect in January, are likely to weigh on Canada’s trade balance. So, expect more red ink in the upcoming trade reports,” National Bank of Canada economist Jocelyn Paquet said in a report.

Stephen Brown, Canada economist for London-based Capital Economics, noted that the deterioration of the Markit Global Manufacturing Purchasing Managers Index – generally a pretty good indicator for the direction of Canada’s non-energy exports – “suggests that there is little scope for a sustained rebound in the coming months.”

The trade report comes late in the process for the Bank of Canada’s next interest-rate decision, which is set for Wednesday morning. Nevertheless, the numbers should reinforce the expected message from the central bank that its rate hikes are on hold for a while, in light of the weakness in the oil sector and a generally cooling economy. The financial markets are pricing in zero chance of another rate hike in Wednesday’s setting – after the bank raised rates three times last year – and only about a one-in-four chance of a hike by April.

But economists still believe additional rate hikes will come in 2019.

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“Looking through near-term data-wiggles ... the Canadian economy still looks to be operating close to capacity. Businesses seem to be continuing to invest, on balance, and labour markets still look strong,” said Royal Bank of Canada senior economist Nathan Janzen. “We expect that conditions will remain strong enough for the Bank of Canada to ultimately continue hiking interest rates at a gradual pace this year – although very likely not at tomorrow’s policy rate decision.”

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