Canada’s trade surplus narrows to $99-million in October

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Canada's trade surplus narrowed to a thin $99-million in October, as the summer doldrums in the country's export resurgence unexpectedly dragged into the fall.

Despite mounting signs of a strong upturn in the U.S. economy, Canada's total exports inched up just 0.1 per cent in October from September. Imports rose a faster 0.5 per cent, resulting in the shrinking surplus.

Statistics Canada also substantially lowered its September surplus figure, to $307-million from the originally reported $710-million. The result is a much starker Canadian trade picture than most observers had been expecting: Over the past three months, the country has run a cumulative surplus of $938-million, a sharp slowdown from the $4.37-billion surplus generated in the prior three months.

The export weakness in October wasn't driven by lower prices, as many observers had anticipated in light of falling commodity prices, but rather by lower shipments. Export volumes fell 1.5 per cent, confounding expectations of rising U.S. demand. (The United States accounts for three-quarters of Canada's exports.)

"Canada's trade report was disappointing, considering the drop in export volumes in a month when U.S. real imports actually rose," said Krishen Rangasamy, senior economist at National Bank of Canada.

In both value and volume terms, exports have been essentially flat over the past five months, after accelerating smartly (up 10.1 per cent in value, up 5.8 per cent in volume) in the first five months of the year. The key drag has been Canada's big energy sector, where exports have declined nearly 10 per cent since May, hurt by both lower prices and volumes – even as the U.S. economy has picked up steam. Energy exports dipped 0.5 per cent in October, their fifth consecutive decline.

"It's a bit of a mystery," said Peter Hall, chief economist at Export Development Canada, a federal agency, of the energy export downturn.

But Mr. Hall said some key segments within the export figures do indicate rising U.S. demand, and bode well for the U.S. recovery and, by extension, for Canada's exports. In particular, exports in machinery and equipment rose 8 per cent in October, evidence that Canada benefited from a sharp pickup in U.S. business investment, a key ingredient for further economic expansion. Machinery and equipment exports are now at their highest since their record level of October, 2008. Electronic and electrical equipment exports rose 5.7 per cent in the month.

He also observed that forest products exports are on the rise, indicative of the pickup in the U.S. housing sector, another key barometer of U.S. economic recovery. "Those are the [export components] I'm really looking to," Mr. Hall said. "The strengths we're seeing are matching the hottest areas south of the border."

Canada's exports to the United States rose 0.7 per cent in the month. But exports to all other markets fell 1.8 per cent, reflecting the slower economic growth in much of the rest of the world. Exports to China fell 2.8 per cent.

On the import side, consumer goods rose 3.1 per cent, driven by higher prices and increased volumes. Imports of aircraft and transportation equipment jumped 12.4 per cent, to a record $1.7-billion. But imports of machinery and equipment slipped 1.2 per cent in the month, suggesting that Canadian businesses investment remains stubbornly subdued.

Over all, import volumes were down 0.2 per cent, while prices were up 0.7 per cent, reflecting the weaker Canadian dollar.

Economists said trade is on track to subtract from Canada's gross domestic product growth in the fourth quarter, after being a strong positive contributor earlier in the year.

"Recent weakness in oil prices will weigh on the nominal trade balance going forward; however, we continue to expect stronger growth in the U.S. economy and a weaker Canadian dollar to support exports in volume terms," said Royal Bank of Canada economist Nathan Janzen.

Meanwhile, the U.S. trade deficit narrowed to $43.4-billion (U.S.) in October from a revised $43.6-billion in September, as exports rose 1.2 per cent and imports climbed 0.9 per cent, despite generally weaker prices as a result of the strong U.S. dollar. Exports grew 2.4 per cent; imports 1.7 per cent.

"The U.S. trade report was good and should help support growth south of the border in the final quarter," Mr. Rangasamy said.

(Editor's note: A previous version of this story stated that the country has run a deficit of $203-million, a sharp reversal from the $4.13-billion surplus generated in the prior three months. In fact, over the past three months, the country has run a cumulative surplus of $938-million, a sharp slowdown from the $4.37-billion surplus generated in the prior three months.)