Better-than-expected Canadian trade numbers may well have dressed up prospects for Canada's fourth-quarter GDP growth. Sort of the same way a nice shade of lipstick dresses up a pig.
According to figures released Tuesday, Canada eliminated most of its trade deficit in October – shaving it down to $169-million from $1-billion in September. The sharp turnaround from the end of the third quarter to the beginning of the fourth quarter suggests there will be a substantial contribution from trade to fourth-quarter GDP growth – perhaps as many as two percentage points to the annualized number, said RBC Dominion Securities assistant chief economist Paul Ferley. Considering that a deteriorating trade deficit subtracted three percentage points from the third quarter's anemic 0.6-per-cent annualized growth, that's a hefty reversal.
For GDP watchers and worriers, the timing is impeccable. Just a day earlier, we were fretting that weak housing starts numbers implied that the slumping residential sector would drag down fourth-quarter growth. But with the trade balance suddenly offering a much bigger boost than expected, a decent fourth-quarter GDP growth number is now back on table. Right?
Um, not so fast. There's more than one road to shrinking a trade deficit – and this one, on closer inspection, was riddled with economic potholes.
Volumes of Canadian exports didn't grow a shred in the month. Two key areas where growth had been anticipated – energy and autos – actually declined. The entire trade-balance improvement came from a jarring 2.1-per-cent tumble in import volumes.
Those slumping import numbers are evidence of a slowdown in demand from both Canadian consumers and businesses. And such a slowdown suggests that domestic demand could well take a big bite out of fourth-quarter GDP – wiping out any benefits on the trade side.
"The recent slowdown in import volumes hints that growth in the domestic economy, in particular business investment, might be even weaker than we had previously assumed," said Capital Economics chief Canadian economist David Madani – adding that to him, the trade numbers actually increased the downside risk on his projection of 1.5-per-cent annualized growth in the fourth quarter.
In this case, it looks like what the apparently improved headline trade numbers giveth, the harsher details taketh away.