Highlights:
- Canada’s nominal merchandise trade deficit improved to $3.0 billion in July.
- Much of both a 4.9% export drop and 6.0% import drop reflected lower prices although both also declined in volume terms.Non-energy export volumes were down from a year-ago for the first time since February. Import volumes were still up 5.0% from last July with the year-over-year gain led by the equipment components.
Our Take:
The July deficit improved slightly more than markets expected ahead of the report but the $3.0 billion shortfall is still historically large. Part of a 1.6% drop in July export volumes reflected transitory factors with traditional July factory shutdowns in the auto sector lasting longer than usual this year. Nonetheless, the drop leaves early risk that export growth in Q3 will retrace at least part of a 10% (annualized) Q2 gain with non-energy export volumes falling below year-ago levels for the first time since February. The import picture was more encouraging. Overall import volumes fell 2.5% in July but with most of the drop from a large 33% decline in the often-volatile aircraft component. Overall import volumes were still up 5.0% from a year ago. That increase subtracts from the net trade balance but is a positive indicator for domestic demand. Import growth has been encouragingly led by Industrial and electrical equipment imports which both rose further in July and were up 13% from a year ago. That provides further evidence that business investment growth in the first half of the year extended into Q3.
Weakness in exports – were it to persist – could be a concern for the Bank of Canada but the data is volatile and the import data remains consistent with a stronger domestic economic backdrop, particularly for business investment. We continue to think the economy looks strong enough to absorb further rate hikes, although we expect the next 25 basis point increase will come in October rather than in the Bank of Canada’s rate announcement later this morning.
