Canadian Trade Back To Deficit In October

Canada’s merchandise trade balance returned to a deficit of C$0.89 bn in October (top chart) versus consensus expectations for a surplus of C$0.7 bn. The prior month was revised down a bit to a surplus of C$1 bn from C$1.25 bn. In October, exports fell 3% as the decline in energy (-5.8%), forestry (-4.3%), machinery and equipment (-0.5%), agricultural products (-2.2%) and industrial goods and materials (-6%) more than offset the gains in autos (+4%). Imports rose 1.9% thanks in part to the 3.8% increase in machinery and equipment. Exports to the US fell 1% after a 4.5% gain in the prior month, leading to our trade surplus with America to fall by almost a billion to C$3.1 bn in October. In real terms, exports fell 3.2% while imports rose 1.2%.

OPINION: October’s merchandise trade report was quite bearish. With the decrease in volumes, Canadian exports are now tracking -8.6% annualized in the final quarter of year, after an 18% increase in Q3 (middle chart). So, trade looks to be a drag on Q4 GDP at this point. One positive from the report, however, was the rise in real imports of machinery and equipment (+1.8% in October) which points to a stabilization in business investment in Q4, after a contraction in the prior quarter. The rebound in auto exports was expected and solid demand for autos in the US (if November sales are any guide) suggest further gains ahead for Canadian auto exports.

The trade outlook for next year isn’t rosy as Canadian exporters grapple with severe headwinds in the form of a slower global economy and a strong Canadian dollar. Given the lagged response of trade to currency movements, Canada has yet to feel the full impact of a near-parity exchange rate. So, the long-term downtrend in the non-energy trade balance isn’t likely to be interrupted anytime soon (bottom chart).