Highlights:
- Canada’s nominal merchandise trade deficit widened to $3.2 billion in December from $2.7 billion in November.
- Exports increased 0.6% but that was outpaced by a 1.5% jump in imports that built on the already large 6.3% gain in November.
Our Take:
The widening in the trade deficit was unexpected – markets were looking for a small improvement in December. The deterioration, though, was driven by increased domestic demand unexpectedly sending imports up 1.5% to build on the whopping 6.3% increase in November. Industrial equipment imports were particularly strong in December – and indeed in all of Q4 – suggesting that part of the deterioration in the trade balance was due to increased business investment. Statistics Canada noted that an outsized surge in logging, mining, and construction equipment probably was due to companies importing equipment ahead of new emissions regulations that began in January 2018 – although industrial equipment imports were still up 3% excluding that component. A 0.6% increase in exports was entirely due to higher prices but a 0.2% dip in volume terms nonetheless only partially retraced increases over the prior two months. Ex-energy exports fell more in December, declining about half a percent in volume terms by our calculation. That followed a big 2% increase in November but ex-energy export volumes were still modestly below year-ago levels in December.
Admittedly, underlying export growth has remained modest and there was little sign of acceleration in December. That is not really new, though, and the import strength continues to point to further firming in domestic demand. In an accounting sense, net trade is likely to be a larger drag on Q4 GDP growth than we previously expected. Because the import strength should show up as offsetting strength in domestic demand, though, we continue to expect an above-potential gain of close to 2% in overall GDP in the fourth quarter.
