Canadian Trade Deficit Narrowed In December

Canada’s merchandise trade deficit narrowed to C$0.9 bn in December from a revised C$1.7 bn deficit (C$2 bn deficit before revision). That was better than expected by consensus which was looking for a deficit of C$1.5 bn. But the "improvement" in the trade balance was not of the good variety, given that it was a result of a decline in two-way trade, with imports (- 2.8%) falling faster than exports (-0.9%). December exports were hit by a decline in energy (-6.9%) and transportation items like autos (-6.8%) and aircrafts (- 13.2%), which more than offset increases in other categories. The drop in imports was more broad-based. Of particular concern was the decline in imports of capital equipment (-6.5% for industrial machinery and - 1.4% for electronics, both in real terms). In real terms total exports fell 1.1%, while total imports dropped 2.5%, the latter reversing the prior month's increase. The narrowing deficit in December was not enough to prevent a C$12 bn annual goods trade deficit last year, the worst on records (top chart).




OPINION: The December trade report was much weaker in the details than in the headline. The "improvement" in the deficit was due to imports falling faster than exports. The drop in imports likely reflects waning demand, not a good thing for the economy (note that consumer goods imports were down 2.1%).

Exports were also disappointing, although we expect a rebound particularly for autos given the surge in auto assemblies in the US. Still, with December's drop, real exports fell at annualized pace of 2.5% in Q4 (after an 8.7% slump in the prior quarter), while real imports fell 2.6% after a 0.8% advance in Q3. So trade wasn't good for Canada in the last quarter of 2012. Business investment wasn't great either based on the soft imports of equipment. All told, Canadian economic growth likely remained soft at around 1% annualized in Q4 after a very disappointing Q3.