Canada recorded a merchandise trade surplus of $778 million in July, down from a surplus of $2.6 billion in June. Merchandise exports increased a modest 0.6% (m/m), but imports grew at a much larger 4.2% pace. Stripping away price effects, the picture was more disappointing. Export volumes fell 0.3%, whereas import volumes increased 1.9%.
Despite the modest overall increase in exports, growth was relatively broad-based, spanning 7 of the 11 industries. Exports of motor vehicles and parts (+6.4%) contributed the most to the nominal headline increase. This was complemented by solid performances in the energy (+1.9%), electronic and electrical equipment and parts (+7.9%), and aircraft and other transportation equipment (+8.3%) industries, among others. These increases were offset by a sizeable drop in exports of forestry products and building and packaging materials (-12.7%), primarily as a result of lower lumber prices.
Imports rose in 9 of the 11 industries, led by a massive increase in motor vehicles and parts (+21.1%). Imports of electronic and electric equipment and parts (+8.5%) were also strong. Lower imports of consumer goods (-5.3%), largely as a result of a slump in imports of pharmaceutical products, provided some offset to the overall headline increase.
In a separate release, Statistics Canada revealed that services exports were up 1.2% on the month, whereas imports increased 3.7%.
Key Implications
Add today’s international trade report to the list of recent negative economic surprises suggesting that the Canadian economy hit a soft patch in the beginning of the third quarter. But despite the overall negative implications of the report, not all the details were gloomy. For instance, the strong increase in imports points to improved domestic demand during the month. Several industries also showed solid export growth.
Despite still-positive manufacturing sentiment in the U.S. and Canada (as revealed by recent PMI releases in both countries), exports remain susceptible to continued volatility in the months ahead on the back of supply chain disruptions and emerging risks to demand. On the supply side, shipping costs remain elevated, and a major auto manufacturer has recently announced production cuts in North America due to component shortages. Meanwhile, demand and consumer confidence may be prone to some downside risks as a result of the delta-variant driven increase in cases and hospitalizations in some countries.
