Highlights:
- June’s $0.6 billion deficit is the smallest since January 2017.
- Exports rose 4.1% in June though roughly half of that increase was price-related. Imports edged down only slightly.
- Non-energy export volumes rose for the third time in four months and were up strongly in Q2. But the level itself remains in the same range seen over the last few years.
Our Take:
We thought steel and aluminum tariffs would be the story of this morning’s trade report, but strong export growth in most other sectors swamped the impact of those new duties. The trade deficit shrank dramatically to $0.6 billion in June from $2.7 billion in May—a much better outcome than markets expected. The smaller shortfall almost entirely reflected a 4% increase in exports. About half of that came from energy (largely price-driven) and aircraft shipments, but other industries also recorded solid gains. That caps off an impressive quarter for Canadian exporters, with volumes up a whopping 16% annualized in Q2—the strongest pace in four years. We thought trade would add solidly to growth in the second quarter but today’s data has us nearly doubling the expected contribution. Our current monitoring for 3% GDP growth in Q2 includes about a 2 percentage point add from net exports—a welcomed change following three consecutive quarters of drag from trade.
Today’s report is the latest in a string of upside surprises that include May’s GDP data and June inflation numbers. Exports are key to the Bank of Canada’s forecast for sustained GDP growth over the coming year, so June’s data will certainly please them. This adds to the case for the BoC to raise rates again in the near-term, though we expect their gradual approach to tightening will see them hold off until October. That would also give them some time to further evaluate the impact of tariffs and trade uncertainty. In July they assumed steel and aluminum tariffs would lower the level of export volumes by 0.6 percentage points, mostly over the second half of this year. If that is accurate, we could see further declines in steel and aluminum exports in the coming months.
