Canada's latest trade numbers suggest the economy may be weathering the oil shock better than expected, despite the deep damage being inflicted on the energy sector.
Statistics Canada estimated that Canada's trade deficit widened modestly to $649-million in December, from a revised $335-million in November (originally reported as $644-million). But the good news was that, despite a sharp decline in energy exports, the country's total exports rose 1.5 per cent in the month compared with November. They were outpaced by a 2.3-per-cent rise in imports – evidence that both domestic and foreign demand improved.
And the gains were entirely due to stronger volumes for both exports and imports, as prices were lower, due primarily to oil's plunge. Export volumes were up 3.5 per cent, while import volumes rose 2.8 per cent.
"Although the trade deficit widened in the month, December's increase in nominal exports is encouraging, with solid growth in non-energy exports significantly offsetting price-related declines in the energy component for the first time in several months," said Royal Bank of Canada economist Josh Nye in a research note. He said the "real" trade balance, based on volumes and excluding price effects, was at a five-month high in December.
"This strength in exports likely reflects the positive impact of a weaker Canadian dollar and stronger U.S. growth."
Oil's price nosedive did leave the expected deep mark on exports of energy products, which plunged 10.3 per cent in December, on a 12.3-per-cent decline in prices. But energy export volumes were actually up 2.3 per cent in the month, reflecting strong demand from the accelerating U.S. economy.
Meanwhile, non-energy exports jumped 4.9 per cent in December, suggesting that the lower value of the Canadian dollar, driven down by oil-related selling, is boosting demand for Canadian exports.
Canadian exports to the United States rose 0.6 per cent in the month, despite the sharp drop in the value of energy shipments. Exports to the rest of the world rose 4.5 per cent.
The export growth was led by a 13-per-cent jump in metals and minerals. Consumer goods rose 5.2 per cent, evidence that the drop in fuel costs may be funding consumer appetite for other goods. Manufacturing exports overall were up 4.5 per cent.
On the import side, the gains in imports were broad-based, suggesting relatively healthy Canadian domestic demand despite the impact of the oil shock. Motor vehicle and parts imports rose 3.3 per cent, to a record $8.1-billion. Energy imports jumped 9.3 per cent, as several refineries returned to full capacity after maintenance downtime.
The December results capped a strong rebound year in Canadian trade that nevertheless sputtered in its final quarter, hurt by the downturn in prices for energy products, which accounted for nearly one-quarter of total exports last year. The country's trade surplus for the full year was $5.2-billion, a sharp reversal from 2013's trade deficit of $7.2-billion, as exports surged 10.3 per cent while imports rose 7.6 per cent. But for the fourth quarter, the country had a deficit of nearly $1.6-billion.
"For the fourth quarter as a whole, we estimate that net exports were a big drag on the economy, subtracting one percentage point from GDP growth," said David Madani, Canada economist for international economic research firm Capital Economics. "This supports our view that growth was close to 2.0 per cent annualized, below the Bank of Canada's 2.5 per cent estimate."
And economists cautioned that the oil slump has gotten deeper since December, suggesting that its drag on trade and the overall economy is far from over. However, most expect non-energy exports to help offset the oil-related weakness in the coming months.
"Low oil prices will continue to weigh on nominal exports, but a weaker Canadian dollar and stronger U.S. demand should help export volumes pick up further, with trade expected to make a solid, positive contribution to growth in 2015," Royal Bank's Mr. Nye said. "This will be an important offset to the drag from lower investment in the oil and gas sector."