In a year when Canada's vaunted export engine has misfired, stalled and spewed plumes of black smoke with unsettling frequency, one shouldn't diminish the turnaround of the past two months. But while the good news coming from August's trade figures is welcome and even relieving, it's too early to start equating improvement with momentum.
Statistics Canada reported Wednesday that the country's merchandise trade deficit narrowed more than expected in August, to $1.9-billion from July's $2.2-billion, marking the smallest deficit in seven months. Granted, having your trade balance a couple of billion bucks in the red isn't much cause for a parade, but it sure looks a lot better than the $3-billion-to-$4-billion sinkholes the trade file resided in from March through June.
And, critically, improving exports have been driving the turnaround. Export volumes – the key gauge for demand and contribution to economic activity, filtering out price fluctuations – were up 0.4 per cent month over month in August. While that's not huge, it did add to July's nearly 4-per-cent surge; some economists had anticipated that exports might give back some of that huge July bounce, but instead they held up nicely. (Indeed, the August trade report included an upward revision to July's export calculations, painting a brighter overall picture for exports in the third quarter.)
But some perspective is required here. The export sector has gotten back on its feet, which is a good and necessary thing. It hasn't exactly broken out into a sprint.
Consider that August's exports, by value, are 2.5 per cent below where they were a year earlier; volumes are down 0.5 per cent. Volumes have succeeded in regaining what they lost in May and June, although that still leaves them nearly 5 per cent below the record highs hit early this year.
The two-month bounce in July and August did succeed in refilling the hole created by the Alberta wildfires. August's volume gains were driven by a 3.8-per-cent jump in energy exports, adding to July's 5.4-per-cent surge, as production ramped up from fire-related shutdowns and shipments rebounded in kind. Indeed, energy export volumes have actually accelerated beyond merely recouping their wildfire losses, and are approaching the highs they enjoyed throughout much of 2015 and into the beginning of this year.
But once we weed out the wildfires and their see-saw effects on energy producers, we see an export sector that still looks very much stuck in the doldrums that have bogged it down since early this year. Non-energy export volumes – precisely the thing that the Bank of Canada has been counting on to fuel economic growth in the current business cycle – actually fell 0.4 per cent in August. They've shown no growth from a year earlier, and have fallen more than 5 per cent from their peak in January.
Meanwhile, exports to the United States – by far Canada's biggest trading partner – fell 1.6 per cent in August. Buoyant U.S. growth was supposed to provide the critical fuel for Canadian exports, aided by a cheap Canadian dollar; but the surprisingly tepid U.S. economy this year continues to seriously undermine that story. Canada's August exports to the United States were down more than 5 per cent from a year earlier.
There is one place where these latest trade figures will look impressive – in Canada's third-quarter economic growth estimates. The better-than-expected August result, coupled with the July revision, imply that trade is on track for an even stronger contribution to Canada's gross domestic product growth in the third quarter than economists had previously expected. They now estimate that real GDP grew at an annualized pace of something close to 3.5 per cent in the quarter ended Sept. 30, a strong rebound from the 1.6-per-cent contraction in the second quarter.
But what's baked into that number, beyond the obvious and entirely expected rebound from the wildfires, remains much harder to see. And it certainly isn't apparent in the trade numbers; while the absolute levels of exports are historically relatively strong, there's no escaping that they have done little more over the past two months than return to their sideways drift that has marked much of 2016. There may be reason for hope that trade has better days ahead of it; but if you're looking for a sign that the momentum has kicked in for a new wave of export growth, the August trade report isn't it.
Editor's Note: A previous version of this story said Canada's trade deficit in August was the smallest deficit in 12 months. It was the smallest deficit in seven months.