Canada’s trade deficit narrowed to $135 million in March (previously $1.1 billion), as a 3.8% rise exports outpaced the 1.7% increase in imports. In real terms, the picture was even better, as export volumes were up 2.5% and imports slipped 0.2%.
The rise in exports was widespread, led by energy, consumer goods and metal and non-metallic mineral products which were all up by 7% during the month. The jump in energy exports was driven largely by higher natural gas and coal exports. A decline in motor vehicle and metal ores and non-metallic minerals provided some offset.
Canada’s trade surplus with the U.S. narrowed to $4 billion in March (previously $4.5 billion), while its deficit with the rest of the world narrowed to $4.1 billion (previously $5.6 billion).
Key Implications
The bounce back in export volumes is certainly a welcome development, but strong imports and weak exports earlier in the year means that net trade will weigh on economic growth in the first quarter of this year. Even with this drag, the Canadian economy is still on track to advance by a robust 3.4% in Q1. Moreover, March’s trade data will provide a solid hand off for the second quarter.
Going forward, the recent momentum in exports should continue, as the Canadian dollar remains under pressure – the loonie fell below 73 US cents this week for the first time in over a year – and economic activity in the U.S. is set to pick up after a slow start to the year.
The key risk to the outlook remains any potential changes to trade policy with the United States. Last week’s (preliminary) announcement that Canadian softwood lumber exports will be hit with a hefty tariff shows that the new President intends to make good on his promise to ensure fair trade for America. While a NAFTA re-negotiation is almost certain to come, we suspect that the agreement will remain largely intact given the close trading relationship between these two countries and effectively balanced trading relationship when services are accounted for.
