Canadian Merchandise Trade Balance Barely In The Black In February: April 17, 2012

Canada’s merchandise trade surplus narrowed to CAD 0.3bn in February, much softer than consensus expectations. Exports fell 3.9% with declines in resources and autos (latter down 11.9%), dwarfing the small increases in machinery and industrial goods/materials.

Imports rose 0.2%, as the 18.3% increase in energy imports offset declines elsewhere. In real terms exports fell 2.9% while imports were up 0.5%. The deteriorating trade picture was a result of weaker US demand (overall US imports of goods actually fell 3.9% in real terms in the month). As a result Canada’s trade surplus with the US shrunk by more than a billion to CAD 4.8bn (top chart).

Opinion

The deteriorating trade picture was clearly a result of weaker US demand. Our energy trade surplus fell by more than CAD 2.5 bn (as US crude import volumes plummeted in February). Export weakness wasn’t isolated to energy with most export categories seeing declining volumes. The 10.7% drop in autos real exports was notable, after five straight monthly increases.

It was indeed a slow start to the year for exporters (drop in volumes in both January and February), but there is room for catch up. Auto sales have been quite strong stateside, and if sustained that, coupled with low inventories, should help our autos and parts sector (middle chart). Moreover, the sharp cutback in US oil imports is likely to be temporary. So if, as we expect, US domestic demand holds firm, Canadian exporters can expect a rebound.

Despite February’s weak results, trade looks to be a contributor to Canadian economic growth thanks to the good handoff from December. Real exports are now tracking +8.4% annualized in Q1 versus just 1.9% for import volumes. With February’s decline, imports of machinery and equipment are tracking -2.2% annualized in the quarter, pointing to a deceleration in investment spending in Q1 (bottom chart).