Canada’s trade deficit narrowed to $3.0B in July (from $3.8B in June), as the 6% drop in imports outpaced the 4.9% decline in exports. In real terms, imports were down 2.3%, while exports slid by 1.1%.
The decline in exports was widespread, led by aircraft (-18%) and motor vehicles and parts (-10%). Metal ores and non-metallic minerals (+12%) was the only commodity group to record a rise during the month.
The drop in imports was also broad based, with aircraft (-35%), metal ores and non-metallic minerals (-19%) and energy products (-15%) all recording double digit declines during the month.
Canada’s trade surplus with the U.S. widened to $2.9B in July (from $1.8B), as imports (-6.7%) fell more than exports (-3.2%). Canada’s trade deficit with the rest of the world rose to $5.9B (preciously $5.6B) as exports were down 10% and imports slid 4.7%.
Key Implications
Export volumes have fallen for two consecutive months now, which provides a weak handoff for the third quarter. Overall, Q3 growth is tracking about 2.4% now. This is a marked deceleration from the robust 4.5% seen in Q2, but is still a solid pace of growth.
Going forward, while the recent strength in the Canadian dollar, which has pushed just above 80 US cents, has somewhat reduced competitiveness of Canadian exporters, demand for Canadian-made goods should gain some support from healthy U.S. economic growth. Of course NAFTA negotiations pose some risk to the future trade relationship between Canada and the U.S., however, it appears as though a deal is still a long way off.
All told, the Canadian economy is still going strong and we expect the Bank of Canada to continue its rate hiking cycle. While a move is possible this morning, we expect the Bank will hold off until October.
