Canadian Trade Balance Improved In September

Canada’s merchandise trade deficit narrowed to CAD 0.83 bn in September from a revised CAD 1.5 bn deficit as both the energy and non-energy trade balances improved. Exports rose 1.9% as increases in energy, industrial machinery, and aircrafts offset declines in other categories including the 0.7% drop in autos. Imports were flat as the decline in energy, industrial machinery and consumer goods were offset by gains elsewhere. The goods trade surplus with the US rose a bit to CAD 3.5bn, although that remains well below pre-recession levels (top chart). In real terms, Canada’s exports rose 0.8% in September, while imports were up 1.5%.

OPINION: The September trade report was better than expected with an increase in two-way trade, i.e. both export and import volumes were up. Still, that didn't compensate for a poor start to the quarter as our export volumes contracted at an annualized pace of 8.4% in Q3, the third straight quarterly decline.

The slow global economy is certainly to blame, although the negative impact of the strong Canadian dollar cannot be ignored. In Q3, energy led the decline with a 23.5% annualized contraction in exports, but the manufacturing sector (outside of autos) was also in the red as evidenced by the decline in exports of industrial machinery, electronic equipment and aircrafts (middle chart). Overall, that was the worst export performance since the 2009 recession and it will result in a significant trade drag, chopping three full percentage points from Q3 GDP growth.

But that was just part of the headwinds sweeping Canada in Q3. Domestic demand also seems to have struggled with a moderation in Q3 business investment spending based on the soft import volumes of machinery and electronics in the quarter (bottom chart).

All told, the improvement in trade in September won't prevent a weak Canadian GDP print for Q3 — we’re calling for growth of just 0.8% annualized for the quarter. With the Q3 headwinds seemingly persisting into the current quarter, we’re not expecting a sharp rebound in Q4 growth either.