Canadian Merchandise Trade Surplus Hits Three-Year High in December

: Canada’s merchandise trade surplus soared in December to C$2.7 bn, more than triple consensus expectations. That was the highest surplus in over three years. That coincided with the highest trade surplus with the US in three years (top chart). The prior month was revised up a bit to a surplus of C$1.2 bn. In December, exports rose 4.5% with broad-based gains, including machinery/equipment (+9.2%), autos (+6.7%), industrial goods/materials (+3.8%), energy (+1.7%). Imports rose only 0.8% as declines in energy imports (- 7.5%) largely offset increases in other categories. In real terms exports rose 5.1% while imports fell 0.5%.

OPINION: After a poor start to the quarter, Canadian exporters bounced back in style. And it wasn’t about energy. In December, the non-energy trade balance improved by roughly one billion dollars, twice as much as the improvement in the energy trade balance. Nonenergy exports are now back to pre-recession levels (middle chart). Clearly, the ramp up in the US economy is significantly helping Canadian exporters overcome the headwinds provided by the strong currency.

With December's hot numbers, trade is now set to be a contributor to Q4 GDP (bottom chart). With the increase in volumes, exports are now tracking 7% annualized in the final quarter of year, after a 16.2% increase in Q3. Import volumes, in contrast, are up just 0.5% annualized. The trade numbers also provided some clues to one important component of domestic demand, namely business investment. After the latter’s sharp contraction in Q3, we saw some stabilization in the final quarter of 2011. The rise in real imports of machinery and equipment in December (+1.7%) allowed the quarter to end flat for that component. All told, a very positive December trade report for Canada, suggesting healthy growth in the month, and consistent with Q4 growth of around 2% annualized.