Highlights:
- Canada’s nominal merchandise trade deficit widened to $3.4 billion in August from $3.0 billion in July.
- Export volumes declined for a third-consecutive month, led for a third-consecutive time by lower non-energy exports.
- Imports continue to outperform, suggesting that domestic demand remains strong.
Our Take:
Exports fell 1.0% in nominal terms and 1.5% controlling for price changes. The August pullback marks a third consecutive monthly export volumes drop with non-energy exports once again leading the way lower. The international trade data is notoriously volatile and much of the recent pullback looks to be just a retracement from four consecutive quarters of gains, culminating in a 10% jump in overall export volumes in Q2 that was clearly not sustainable. We continue to expect that a pickup in trade growth globally in recent quarters and signs of life in the U.S. industrial sector will ultimately support a return to a gradual uptrend in Canadian exports going forward, although attention will also be paid to any signs that the (broadly-based) appreciation in the Canadian dollar since early June is eating into Canada’s share of foreign demand. The import data continues to look more encouraging. Import volumes inched up 0.3% in August and were still up 3.1% from a year ago. Imports of industrial equipment – a key indicator of domestic business investment spending – inched lower in volume terms in August but were still up 13% from a year ago and a whopping 18% (annualized rate) Q3 to-date relative to Q2. The relative strength in imports is a negative for the trade balance but argues that domestic demand remains strong.
On balance, today’s data adds to the evidence that the outsized outperformance of the economy over the last year is coming to an end. It also, however, does not alter our expectation that growth will still remain at an ‘above-potential’ pace and – with the economy probably already quite close to capacity limits – that further gradual Bank of Canada interest rate hikes will be warranted.
