Canada posted its worst monthly and quarterly trade deficit in history as the economy wore the scars of the oil price shock, but improving volumes of both imports and exports suggest that brighter days may be on the way.
Statistics Canada reported a March trade deficit of $3-billion, surpassing the previous record of $2.87-billion in July, 2012. The government statistical agency also made a major downward revision to its February number, to a deficit of $2.2-billion from an originally reported $984-million, and revised the January deficit to $1.8-billion from $1.5-billion.
The resulting $7-billion deficit in the first quarter was the biggest ever recorded, reflecting the severe damage wrought by the steep drop in prices for oil, one of Canada's biggest exports. Exports of energy products plunged by $5.8-billion, or more than 20 per cent, in the quarter.
Yet the Canadian dollar actually rose by one-third of a cent against its U.S. counterpart, creeping above 83 cents (U.S.), in the wake of the trade report, as economists saw silver linings in the record deficit numbers.
"The deterioration appears to have been entirely the result of lower export prices, led by weaker energy prices. The volume trade balance actually improved modestly in the first quarter," said Nathan Janzen, senior economist at Royal Bank of Canada, in a research note.
Indeed, the record March deficit showed a smart rebound in volumes for both imports and exports in the month. Import volumes were up 1.5 per cent, while prices improved by 0.5 per cent, for an overall gain of 2.2 per cent in dollar terms. Exports showed even better volume growth, up 1.9 per cent, but export prices fell 1.5 per cent, reducing the growth on a value basis to 0.4 per cent.
"The strengthening in the volume of exports in March is encouraging, and provides support to the view that the sizeable drop a month earlier was more a reflection of severe winter weather and temporary factory shutdowns in the auto sector than a slowing in underlying external demand," Mr. Janzen said.
March exports were led by an 11.7-per-cent rebound in auto-sector shipments, which had slumped in February amid plant maintenance and retooling shutdowns. However, that was largely offset by renewed weakness in the energy sector, where exports slumped 8.9 per cent, due to a drop in both prices (down 7 per cent) and volumes (down 2.1 per cent).
Excluding the energy sector, Canada's exports were up a solid 2.4 per cent in March. Many economists, including those at the Bank of Canada, have been looking for strength in non-energy exports to help lift Canada out of its first-quarter economic funk brought on by the dramatic drop in oil prices. The central bank has predicted that the economy would improve beyond the first quarter.
"A record trade deficit will make some headlines, but that'll be a rear-view look at what the fall in oil prices – which hit their lows in March – had on Canadian trade. The export volume gain, and the performance of shipments ex-energy, mean that the monthly GDP outlook for March hasn't been too severely impacted, and the flat reading on first-quarter GDP expected by the Bank of Canada still remains likely a bit too pessimistic," said Canadian Imperial Bank of Commerce economist Nick Exharos in a research report.
The import side, meanwhile, showed continued improvement in Canadian consumer demand. Statscan said consumer goods imports jumped 7.9 per cent in March, their fourth consecutive month-to-month increase. The March gains were widespread, as 16 of 20 segments of the consumer-goods sector showed increases. Imports of motor vehicles and parts also added to the month's gains, up 3.7 per cent.
"No signs here that Canadian consumers are taking a breather, despite the big drop in oil prices and what appears to be a soft economic backdrop," said Benjamin Reitzes, senior economist at BMO Nesbitt Burns, in a research note.
The U.S. trade numbers for March, released at the same time as the Canadian data, also showed evidence of an economy bouncing back from a harsh winter slowdown, as well as West Coast port strikes that had hampered trade in February. The deficit of $51.4-billion (U.S.) was considerably bigger than the $42-billion that economists had expected, and was up sharply from February's $35.9-billion. But it resulted from a 7.7-per-cent surge in imports, which outweighed a more modest 0.9-per-cent rise in exports.
"Following the resolution of the labour dispute in February, the West Coast ports began to work through their backlogs in March," said Paul Ashworth, chief U.S. economist at Capital Economics. "Assuming that most of the catch-up is now complete, then imports should fall back in April, bringing the trade deficit down to a more normal level, too."
"With our neighbour to the south expected to bounce back in the second quarter, the loonie staying relatively weak … and oil prices staging a modest comeback, Canada's trade profile is expected to improve in the months ahead," Mr. Reitzes concluded.