- Canada recorded a trade deficit of $1.1 billion in March, following a surplus of $1.4 billion in February. Exports were up a modest 0.3% on the month, whereas imports surged by 5.5%. The picture was more discouraging after accounting for price effects, with export volumes down 0.3% and import volumes up a significant 7%.
- The surge in imports was broad-based, with all 11 industries witnessing a solid increase during the month. Imports of energy products (+54.7%) provided the biggest lift in March, followed by motor vehicles and parts (+4.6%) and consumer goods (+2.6%)
- Only 5 of the 11 industries recorded export gains. Motor vehicles and parts (+10.2%), metal ores and non-metallic minerals (+33%), metals and non-metallic mineral products (+4.7%), and forestry products and building materials (+4%) prevented the headline export reading from slipping into negative territory. However, Statistics Canada noted that weaknesses in auto production may intensify in the coming months as the industry continues to grapple with a global shortage in semiconductors. Notable weaknesses were seen in energy product exports (-6.7%) and aircraft and other transportation equipment (-23.8%). The decline in energy exports was driven by lower natural gas exports (-46.7%).
Key Implications
- Not the most encouraging trade report, with the decline in export volumes and the return to deficit territory likely to subtract from real GDP. Still, monthly trade data is notoriously volatile. The subdued performance in exports was largely driven by base effects from January and February, with natural gas and aircraft exports reversing some unusually strong (and mostly transitory) gains in the prior months. At the same time, the solid showing in imports may be indicative of stronger domestic demand, reflecting some underlying strength in the economy.
- Canada’s trade balance appears to be caught in the cross-winds of rising demand and supply chain bottlenecks. Robust demand and prices in the commodities sector and a swiftly recovering U.S. economy should keep export trends on a solid footing. This is reaffirmed by persistently strong manufacturing sentiment readings in the U.S. and Canada. However, supply chain disruptions are emerging as a potential headwind to export growth. Rising shipping costs and longer supplier delivery times may dampen the boost to exports from rising demand south of the border and elsewhere. Shortages in raw and intermediate materials may also impede growth. The slowdown in auto production is a case in point.
