Canada’s trade deficit narrowed to $1.9B in January (previously $3.1B). Imports broadly fell 4.3%, largely driven lower by declines in industrial machinery, equipment, and parts, while exports declined 2.1%, due to declines in the export of passenger cars and light trucks. In real or volume terms, exports declined 3.6% while imports fell 3.9%.
Following two consecutive months of strong increases, imports of industrial machinery, equipment and parts fell 11.3% in January. In addition, the import of logging, mining, and construction machinery and equipment fell 40%. According to Statistics Canada, part of the January decline in imports was likely related to new regulations on off-road diesel engine and machine emissions that took effect at the start of January, which likely limited imports to machinery that met the new standards.
After three consecutive monthly gains, exports fell back in January. Despite a sixth consecutive, price-driven advance in exports of energy products (+2.9% m/m), declines in passenger cars and light trucks (-13.1%) and forestry products and building and packaging materials (-6.6%) helped drag down the headline figure. Statistics Canada notes that atypical plant closures in January were responsible for the decline in imports of motor vehicle engines and parts, while the resumption of the collection of import duties by the U.S. Department of Commerce likely contributed to the decline in export of forestry related products.
Canada’s merchandise trade surplus with the U.S. narrowed to $3.1B in January (previously $3.6B), owing to exports falling more than imports. Canada’s trade deficit with the rest of the world narrowed to $5.0B (previously $6.6B), as imports fell 8.5% while exports rose a touch (+0.4%).
Key Implications
The January trade data was disappointing, with both export and import volumes declining. While the decline in import volumes was expected after a strong performance in prior months, the trend of weak export numbers pours cold water on the notion that the Canadian economy is rotating away from consumption and housing toward investment and trade. Having said that, some of the weakness in exports is due to temporary factors that should reverse in coming months, and given the volatility in the month-to-month trade data, exports could very well strengthen through the first quarter.
Looking ahead, stronger demand from the U.S. and a sub-80 US cent loonie should provide some support for Canadian exports. But, NAFTA renegotiations pose some risk, and new protectionist rhetoric from the U.S. administration concerning steel and aluminum tariffs only serves to further elevate trade uncertainty.
Later this morning the Bank of Canada is scheduled to announce its decision on interest rates. Given the elevated level of policy uncertainty emanating from the U.S. administration and slowing economic momentum in Canada, the Bank is likely to leave its policy rate unchanged.
