Canada’s trade deficit widened to $3.4B in August (from $3.0B in July), as exports fell 1% while imports held steady. In real terms, export volumes were down by an even larger 1.9%, while import volumes eked out a slight 0.2% gain.
Exports were down in 5 of 11 industries, led by metal ores and non-metallic minerals (-9.7%), chemical, plastic and rubber products (-5.9%) and consumer goods (-3.8%). Meanwhile, aircraft and other transportation equipment (+3.1%) and electronic equipment (+2.5%) were the top performers during the month.
Imports were unchanged, as declines in aircraft and other transportation equipment (-10.2%) were offset by increases in metal ores and non-metallic minerals (+9.9%) and motor vehicles (+2.5%).
Canada’s trade surplus with the U.S. narrowed to $2.3B in August (previously $3.2B), as exports slipped 1.8% while imports were up 0.9%. Canada’s trade deficit with the rest of the world narrowed to $5.7B (previously $6.2B), with exports up 1.5% and imports down 1.6% during the month.
Key Implications
August marks the third consecutive month of declines in export volumes, which now sit 6% lower than the peak reached in May. This weak handoff for the third quarter suggests that net trade is likely to detract from overall growth during the quarter. Even with this disappointing report, economic activity remains on track to expand by a solid 2.2% in Q3.
Going forward, a healthy U.S. economy should help to prop up demand for Canadian-made goods, supporting export volumes. However, the appreciation of the loonie since early-September has somewhat reduced the competitiveness of Canadian exporters and could provide some offset. The outcome of the NAFTA re-negotiations also poses some risk, but with negotiations moving slowly, it is unlikely to impact trade this year.
Overall, the Canadian economy is on solid footing, and the Bank of Canada is likely to maintain a tightening bias. Future hikes will be heavily data dependent with recent export performance a weak spot. However, there are a number of key data releases between now and the next Fixed Announcement Date later this month that will influence the Bank’s decision.
