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Canada’s trade deficit hits five-month low after exports rebound

Container ships are loaded and unloaded at the TSI Terminal Systems Inc at Deltaport in Delta, B.C.

Lyle Stafford/The Globe and Mail

Canada's trade deficit shrank to a five-month low in October, buoyed by an encouraging rebound in recently slumping exports.

Statistics Canada reported a trade deficit of $1.48-billion in the month, down sharply from $3.36-billion in September. It's the smallest shortfall since May, snapping a four-month trade downswing.

The turnaround was punctuated by a bounce-back in exports, which had gone into a funk for months after surging to record highs in the spring. Exports grew 2.7 per cent month over month in value terms, fuelled by stronger prices and a 1.2-per-cent rise in volumes.

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The export gains were broadly based, with nine of 11 sectors posting growth.

The upturn in exports is an encouraging sign for Canada's economic growth in the final quarter of 2017. Slumping exports had been a major drag on the economy in the third quarter, when real gross domestic product growth slowed to less than half the pace of the first half of the year.

"We're eagerly awaiting signs on fourth-quarter growth after the third-quarter's slowdown, and trade data for October give us reason for optimism," Nick Exarhos, senior economist at Canadian Imperial Bank of Commerce, said in a research note. "But we still have more work to do in reversing the past few months disappointment on real exports."

Exports were likely helped by a weaker Canadian dollar, which fell 5 cents against its U.S. counterpart between early September and the end of October. This was amid dwindling expectations of further Bank of Canada interest-rate increases following two rate hikes in the summer. Exporters generally benefit from a lower Canadian currency, as it effectively reduces the price of their goods for foreign buyers.

Exports also got a lift from a rebounding U.S. economy, after hurricane-related disruptions that slowed demand in September. Exports to the United States, by far Canada's biggest trading partner, jumped 4.1 per cent month over month.

"Looking ahead, exports should manage to gain some traction, supported by a healthy U.S. economy and a Canadian dollar hovering around the 80-U.S.-cent mark," Toronto-Dominion Bank economist Dina Ignjatovic said in a research report.

On the other side of the trade ledger, imports fell 1.6 per cent month over month despite higher prices, as volumes slumped 3.9 per cent. While the lower imports did help improve the trade balance, economists typically view declining imports as a sign of concern, as they imply weaker domestic demand.

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However, much of October's import weakness came from an 8.1-per-cent decline in the big autos sector, which was substantially slowed by a strike at the General Motors of Canada-owned CAMI Automotive plant in Ingersoll, Ont., and a shutdown at Chrysler's Windsor, Ont., minivan plant to upgrade airbags. Both facilities have since reopened, suggesting that imports in the sector are poised to recover.

The trade numbers, coupled with the strong November employment data released last week, suggest that the Canadian economy has picked up speed in the fourth quarter. Both reports send important signals to the Bank of Canada, and arrive just ahead of Wednesday's interest-rate decision.

Economists believe the improving data aren't enough to convince the central bank to raise rates at this time, especially given that the trade numbers landed late in the bank's rate deliberations. But they strengthen the case for the bank to resume rate hikes in the first quarter of next year, perhaps as early as its mid-January rate announcement. (The bond market is pricing in about a 40-per-cent probability of a January hike, versus just 17-per-cent chance in Wednesday's decision.)

But some economists are concerned that imports of industrial machinery and equipment slumped for the third time in four months, an indication that business capital investment – a critical driver of economic expansion – may be stalling, after showing encouraging growth for much of the past year. The Bank of Canada has been counting on business investment to continue to expand solidly over the next year, based on responses from companies in the bank's quarterly Business Outlook Survey.

"The evidence at the margin, through hard data, is signalling that the exact opposite is happening," Bank of Nova Scotia economist Derek Holt said in a research note.

He suggested that the central bank's most recent survey, released in mid-October and conducted from Aug. 24 to Sept. 19, may have predated much of the growing pessimism about the NAFTA renegotiations. As uncertainty builds, businesses may be increasingly hesitant to commit to major investments.

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"Businesses can't be blamed for being more guarded toward investing millions or billions into new projects, when the rules of the trade and investment regime are potentially up in the air," Mr. Holt said.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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