As Canada's near-record May trade deficit deals another blow to the country's tottering economy, the mounting evidence may be pushing the Bank of Canada ever closer to another interest-rate cut.
Statistics Canada reported Tuesday morning that the merchandise trade deficit widened to $3.3-billion in May from $3-billion in April, the eighth consecutive trade shortfall. The May deficit was the second-largest in history, exceeded only by March's revised $3.5-billion.
Economists had expected a modest improvement in the May numbers, in light of a strengthening U.S. economy and the fading of temporary factors that had weighed down trade over the winter. Instead, what they saw was another dismal report in which one of the key ingredients identified by the Bank of Canada for an economic recovery – namely, a resurgence of non-energy exports – failed to materialize.
"It was the thing that the Bank was hanging its hat on, and the trend has been consistently lower," said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Dominion Securities.
The picture is certainly littered with negatives.
For the first five months of 2015, Canada has now rung up a massive $13.6-billion trade deficit. Exports fell for the fifth straight month in May, despite improved prices, as export volumes slumped 2.5 per cent from April. Exports are now 4.5 per cent below their end-of-2014 levels. Year-to-date exports are down 2.1 per cent from the same period last year.
And even more distressingly, we can no longer blame the battered energy sector for our trade woes. Energy exports have risen in each of the past two months, helped by improved prices. But non-energy exports fell 1 per cent, their second straight decline. On a volume basis, non-energy exports are 2.7 per cent below their year-earlier levels.
Economists said that after a contraction in gross domestic product in the first quarter and another decline in GDP in April, the May trade disappointment adds more weight to the possibility that the Canadian economy contracted again in the just-finished second quarter – making for two consecutive negative quarters, the technical definition of a recession. With trade still showing no signs of providing the lift that Bank of Canada Governor Stephen Poloz has long been predicting, the case for another rate cut to stimulate the sputtering economy is becoming an increasingly compelling one.
"The rotation toward business investment and non-energy exports has yet to materialize, and given the larger-than-anticipated retrenchment in the first half of the year, the Bank of Canada has reason to provide a follow-on rate cut next week," said economist Nick Exarhos of Canadian Imperial Bank of Commerce in a research note.
Indeed, the bond market is now pricing in nearly a 50/50 chance that the central bank will cut rates by one quarter of a percentage point, from the current 0.75 per cent, at next week's rate decision. It is pricing in nearly an 80-per-cent likelihood of a rate cut by the following rate-setting meeting, in September.
But there are a couple of factors that could still tip the scales in favour of standing pat on rates, at least for the time being. The central bank's latest Business Outlook Survey, released Monday, indicated an improvement in the country's business sentiment. It was only a small upturn, but it could be enough to convince the bank that better times are just around the corner.
More significant will be next Friday's employment report for June. With job growth a key driver for rate policy, a strong report, on top of the big 59,000 job jump reported for May, could sway the central bank's thinking.
"Another strong [jobs] report, not our forecast, could be the one thing that keeps Poloz on hold," Mr. Exarhos said.
Editor's note: a previous version of this story said Canada had a trade deficit of $13.6 billion in the first five months of 2014. That figure is for the first five months of 2015.
Editor's note: A previous version of this story said Canada had a trade deficit of $13.6-billion in the first five months of 2014. That figure is for the first five months of 2015.