After a few months in the wilderness, Canada's exports may be back on the right path. Perhaps it's imports that we should be more worried about.
The merchandise trade numbers for November, released Wednesday by Statistics Canada, showed that the country's trade deficit narrowed more than expected in the month, to $2-billion from $2.5-billion in October. Encouragingly, exports grew a decent 0.4 per cent by value, despite lower prices, especially for commodities; export volumes were up 0.7 per cent. And excluding the beleaguered energy sector, whose exports slumped to their lowest monthly value since the Great Recession, non-energy exports were up a brisk 1.6 per cent.
It was the first time in four months that exports have posted growth. For the legions of economists who have long been looking to exports to carry a Canadian economy with few other obvious drivers entering 2016, this turnaround from a three-month slump is most welcome and lends credence to their arguments that a few one-off factors played a large role in the weakness of the previous three months. It's only one month of data, but the November numbers look more like what experts thought they would at this stage.
No doubt the further erosion of the Canadian dollar has been lending exports a helping hand, and will continue to do so, as the weaker currency makes Canadian goods look increasingly attractive to U.S. buyers. Since the loonie renewed its slide in mid-October, it has lost 9 per cent against its counterpart in the United States – which is not only far and away Canada's biggest export market, but also the leading source for demand growth in the developed world right now. Canada's trade surplus with the United States swelled to $2.1-billion in November from $1.7-billion in October; its deficit with the rest of the world was little changed at $4.1-billion.
But the bigger factor in the narrowing of Canada's trade deficit wasn't the growth in exports, but rather an even bigger decline in imports. Import values were down 0.7 per cent, while volumes were even worse, off 1.6 per cent. It was the third successive decline on the import side of the ledger.
That doesn't speak well about domestic consumption, especially consumer demand. Notably, imports of consumer goods slumped 4 per cent over October and November combined.
When your trade balance is improving on the back of declining imports, it's not a good sign for the health of your domestic economy. And, despite the endless talk about Canada being an "export economy," household consumption (57 per cent of gross domestic product in the third quarter) is a far bigger component of the Canadian economy than exports (33 per cent). Domestic consumer demand is critical, and the trade data may be signalling that it is sputtering.
Certainly, the weak dollar is playing a role in this, too, as the lower currency makes imported goods more expensive. But the numbers could also be evidence that Canadian households have run out of gas, especially in the wake of the commodity price slump that has taken a big bite out of incomes in resource-heavy parts of the country. Recent weak retail numbers are suggesting a similar story. In October (the most recent month of data available), Canadian retail sales volumes slumped 0.3 per cent.
Canada's continued low-interest-rate environment, which looks unlikely to change much over the next 12 months, will continue to provide juice for consumer borrowing and spending. But household debt is already at record levels; the upside for consumer demand growth may well be limited. The import and retail sales data may be a signal that consumers are beginning to retrench, low rates be damned.
On a positive note, the November trade numbers do suggest that trade probably made a small positive contribution to fourth-quarter GDP growth. Still, given that trade was responsible for the vast bulk of GDP growth in the third quarter (the only quarter of 2015 reported so far that showed any growth at all), the likely muted trade contribution in the fourth quarter stands as a critical reason why economists don't think the economy grew much, if at all, in the final quarter of the year. Most economists have lowered their fourth-quarter growth estimates to well below 1 per cent annualized, and some have suggested that the number could be closer to zero. We won't know for sure until March 1, when Statistics Canada releases its fourth-quarter GDP report.
Looking beyond the fourth quarter, Canada is going to need a rejuvenation in exports as well as at least reasonably healthy consumer demand if the economy is going to break out of its funk in 2016 – especially in a year when business investment is expected to once again decline significantly. The November trade data are a reminder that even if demand in export markets is making a comeback, demand at home may ultimately be the bigger issue.
U.S. trade deficit narrows
The U.S. trade deficit narrowed in November likely as efforts by businesses to reduce an inventory overhang pushed imports of goods to their lowest level in nearly five years, outpacing a drop in exports. The U.S. Commerce Department said on Wednesday the trade gap fell 5.0 per cent to $42.4-billion (U.S.). October's trade deficit was revised up to $44.6-billion from the previously reported $43.9-billion.
Despite the shrinking trade deficit, declining exports are the latest indication that economic growth braked sharply in the fourth quarter. While inventories likely accounted for much of the drop in imports, the weakness could also be pointing to a slowdown in domestic demand, which was flagged by weak December automobile sales.
Economists polled by Reuters had forecast the trade gap widening to $44.0-billion in November. When adjusted for inflation, the deficit fell to $59.60-billion from $61.03-billion in October.
Trade, which subtracted 0.26 percentage points from gross domestic product in the third quarter, is likely to have remained a drag on growth in the fourth quarter.
A strong U.S. dollar and the inventory bloat, which has left businesses with little appetite to order more merchandise, have combined with spending cuts in the energy sector to take some steam out of the economy in recent months.
Economists this week slashed their fourth-quarter GDP growth estimates by as much as one percentage point to as low as a 0.5 per cent annual pace, which also accounted for unseasonably warm weather that has affected sales of winter apparel and other merchandise.
The U.S. economy grew at a 2-per-cent annual rate in the third quarter.