Sifting through trade data for signs of life

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It’s hard to look at a $4-billion-plus trade deficit and call it “good news,” but Wednesday’s Canadian merchandise-trade report from January was a good-news report – relatively speaking. At least the bleeding stopped.

But whether this might mark a turning of the corner for the ailing trade sector – a critical question for Canada’s economic health in 2019 – is far less certain. And the answer, unfortunately, is probably that while the road ahead might not be so downhill, it’s going to be far from smooth.

Statistics Canada reported that Canada’s merchandise-trade deficit totalled $4.2-billion in January – which, despite being the second-biggest ever, is nevertheless an improvement over December’s record $4.8-billion shortfall. The gap narrowed amid solid month-over-month growth in both imports (up 1.5 per cent) and exports (up 2.9 per cent), evidence of a pick-up in both domestic and external demand. The upswing in exports snapped a dismal run of five consecutive monthly declines – the longest losing streak since the 2008 recession.

It’s notable that this reversal of course came at a time when the energy sector – Canada’s biggest source of exports – had been expected to be a major source of weakness, as Alberta’s government-mandated production cuts came into effect at the beginning of January. Instead, oil exports surged 36.5 per cent month over month – due almost entirely to a sharp rebound in prices, although volumes also managed a small gain. Exporters appear to have met demand by drawing down on their ample supplies of oil in storage – thus chipping away at the extreme inventory excesses that had prompted the production slowdown in the first place. It looks like the biggest export bite from the oil slowdown was already felt in December.

From the standpoint of Canada’s near-term economic growth outlook, the export numbers were good news – although, again, starting from a decidedly weak base. Together with previously released economic data, it now looks like January’s gross domestic product report, to be released on Friday, will show a strong bounce-back from consecutive month-over-month contractions in November and December. Economists at Bank of Nova Scotia calculated that real GDP was up about 0.3 per cent in January, and estimated that growth for the first quarter as a whole now looks on track for about a 1-per-cent annualized rate – hardly spectacular, but nevertheless healthier than the 0.6-per-cent consensus forecast of economists as recently as two weeks ago.

Canada’s export rebound came amid a bounce-back in global trade in general. CPB Netherlands Bureau for Economic Policy Analysis’s monthly World Trade Monitor calculates that global trade volumes jumped about 2.5 per cent in the month, the biggest increase in more than a year, reversing course after a two-month slump. January trade data from the United States, also released on Wednesday, similarly show a rebound in exports.

Nevertheless, there are still some daunting obstacles ahead before we can declare an all-clear for the recent slide in Canadian and global trade flows.

U.S. and global manufacturing purchasing-managers indexes – pretty reliable harbingers of industrial demand – have eased considerably over the past six months, implying a serious slowing of the economic pace. They are still comfortably above recession levels, but they certainly don’t suggest that there’s a big bounce-back in demand in the pipeline.

This has come amid an escalation of trade tensions between the world’s two biggest economic powers – China and the United States – as well as the increasingly messy divorce proceedings between Britain and the European Union. The rising protectionism and trade uncertainty fuelled by these two situations are having a profound effect on investment and spending globally – and that’s translating into stunted trade growth.

Meanwhile, Statscan’s trade report suggests that Canada’s own dispute with China, stemming from the Canadian arrest of Huawei chief financial officer Meng Wanzhou in December, has put a dent in trade. Canadian exports to China plunged 17 per cent in January from December, as Chinese authorities reportedly began bogging down customs clearances for some key Canadian goods, most notably canola. We can expect the slowdown in Canada’s second-biggest export market to deepen, now that China has escalated the matter this month by halting canola-seed shipments entirely from two of Canada’s biggest exporters.

And let’s not forget that the United States still has tariffs imposed on Canadian steel and aluminum. And that the new North American trade agreement still hasn’t been ratified by its three participating governments.

None of this is to say that, after months of deterioration, there isn’t a considerable potential for upside on the trade front. But until at least a few items are cleared from this list of uncertainties, Canadian and global trade will likely remain under a cloud. January may turn out to have marked the turning point from the bottom, but the path upward is still far from clear.