Canadian Trade Deficit Widens In June

Canada’s merchandise trade deficit widened to C$1.8 bn in June, much worse than consensus expectations. That's the largest deficit since September 2010. There was also a downward revision to the prior month’s trade balance. In June, exports rose 0.2%, as the 13.9% increase in auto exports was enough to offset declines in energy, industrial goods, machinery/equipment and agriculture.

Imports rose 2.3% as declines in energy imports were more than offset by increases in other categories. The energy trade surplus fell a bit to CAD 4.7 bn, the lowest since August 2011. Despite the strong showing from auto exporters ― which helped the autos trade deficit to narrow to a five-month low of CAD 0.7 bn ― the non-energy trade deficit widened to CAD 6.5 bn, the worst on records (top chart). With the US cutting back on its imports our surplus with the world’s largest economy dwindled to CAD 3.1 bn, the lowest since August of last year. In real terms, overall Canadian exports rose 0.3% in June, while imports soared 2.5%.

OPINION: With the downward revisions to the prior month and June’s massive deficit, Canada’s merchandise trade deficit was roughly CAD 3.3 bn in Q2, the worst showing since Q2 of last year when the Japanese earthquake and tsunami disrupted global trade. It could have been even worse had it not been for strong vehicle sales in the US which gave a lift to our auto exporters. The worst deficit on records for nonenergy trade in June is concerning because that’s symptomatic of a soft global economy and an arguably overvalued Canadian dollar.

Despite June's gains, real exports are up only 1.1% annualized in Q2 (middle chart). The weakness in the quarter was partly due to another weak performance for exports of industrial goods ― the latter contracted 11.2% annualized in the first half of the year, erasing most of the gains registered in the last half of 2011.

On a positive note, the 5.5% annualized increase in real imports of machinery and equipment in Q2, points to some support for business investment spending in the quarter (bottom chart). That, together with an expected strong showing from housing likely helped offset a potential drag from trade in Q2, helping Canada to a positive but belowpotential GDP print of around 1.5% in the quarter.