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Fundamental Analysis

Canada's Trade Deficit Widens Further in June

Typography

Canada's trade deficit widened to $3.6 billion in June (from $1.4 billion in April), as exports fell 4.3%. Meanwhile imports edged up 0.3%.

The drop in exports comes after three months of consecutive record gains. Declines were fairly broad based, with shipments down in 9 of 11 sectors. Declines in unwrought gold and energy products were the biggest culprits. Year-on-year, exports are still up 12.4%.

The disappointment in June exports was partly due to lower prices for many commodities, but it wasn't the whole story in June. Export volumes were also down 1.7%. June.

On the import side, lower prices also depressed the headline, with import volumes up 0.8% in June. In nominal terms import gains were led by gold bullion, with imports of metal ores and non-metallic minerals up 39% on the month. Like exports, imports have also accelerated over the past year in line with generally better growth in the Canadian economy, and are up 10.4% year-on-year.

Canada's trade surplus with the U.S. narrowed further to $2.2 billion from $3.5 billion in May, registering the smallest surplus in a year. That came as a result of lower crude oil exports outweighing a drop in crude oil imports.

Key Implications

Despite the softness in exports in June, net trade is still expected to make a positive contribution to economic growth in Q2. The second quarter in Canada is likely to have seen a very healthy 3.5% annualized pace of GDP growth. However, growth is on track to slow to a much more sustainable pace in Q3 of below 2%, and a soft hand off on the export side from June is part of the story.

Looking ahead, the recent appreciation in the Canadian dollar has weakened Canada's competitive position slightly. But, healthy U.S. demand should continue to be supportive of exports.

With several sectors of the Canadian economy showing strength, and consistent with the change in tone ahead of their June rate increase, the Bank of Canada is likely to take rates another 25 basis points higher in the fall.

Author: TD Bank Financial Group Website: http://www.td.com/economics/
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
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