Canada’s goods trade deficit narrowed much more than expected in June to $626 million from a slightly revised $2.7bn in May (previously $2.8bn). Exports rose broadly by 4.1% to $50.7 billion, driven higher by energy products, aircraft and other transportation equipment and parts. In contrast, imports fell slightly by 0.2% to $51.3bn, owing to large declines in energy imports and in aircraft and other transportation equipment and parts.
In real or volume terms, exports rose 2.1% while imports contracted 1.3% in June. For the second quarter, export volumes rose 3.8% while import volumes rose 1.7%.
Energy exports increased 7.1% to $9.9bn in June, the highest level since October 2014. This was driven by crude oil exports largely on the strength of prices.
The decline in imports was largely due to temporary factors unwinding. Imports of energy products in June declined dramatically (-15.1%) as a resumption of operations for a number of Canadian refineries that had temporarily shutdown in April and May, and therefore reduced the need for imported fuels.
Canada’s merchandise trade surplus with the U.S. widened to $4.1bn in June from $3.3bn in May, owing to a 2.5% increase in exports outpacing a 0.3% rise in imports.
Key Implications
This report wraps up a solid quarter for Canadian trade. After a flat start to the year, goods exports are set to contribute strongly to GDP growth in the second quarter, which is tracking modestly above 3.0%. That said, steel and aluminum tariffs may have already taken a bite out of Canadian exports to the U.S. in June, as evidenced by roughly a 37% decline in steel exports and a 7% decline in aluminum (unadjusted for seasonality), after recording significant growth from January through May.
June was the first full month for which Canadian exporters had to deal with U.S. tariffs on aluminum and steel targeting about $16.6 billion in annual goods exports. The majority (90-95%) of Canadian and aluminum and steel exports go to the U.S. Canada is the largest steel supplier to the U.S. market (14% share in 2017), and Canadian aluminum producers supplied more than 40% of foreign aluminum demanded by the U.S. market. Thus far, the tariffs appear to be reducing Canadian exports to the U.S., and will likely serve to raise the cost of imported steel and aluminum for U.S. manufacturers with little relief in sight.
Recent news of a progress between Mexico and the U.S. on auto content rules is encouraging, but the reality is that NAFTA negotiations are unlikely to be concluded in the near-term. As such, trade policy uncertainty is likely to continue to dampen the domestic and global outlook for business investment, particularly as the U.S. continues to threaten to escalate tariffs on Chinese goods, many of which are critical to the global supply chain.
