Canadian Trade Returns To Black Ink In September

FACTS: Canada’s merchandise trade balance returned to a surplus for the first time since January, with a C$1.25 bn print for September (top chart), much better than consensus expectations for a deficit. The prior month was also revised upwards a bit. The return to black ink was helped by the surge in exports (+4.2%) and a drop in imports (-0.3%). Energy was the big driver of export gains with an 11.3% increase, but there were also decent gains for autos, forestry, agricultural products and industrial goods and materials, more than offsetting a drop in machinery and equipment. In real terms, exports increased 1.2% while imports fell 1.9%.

OPINION: Unlike in the prior quarter, trade is set to be a contributor to GDP in Q3 thanks to the 18% annualized increase in export volumes in the quarter (middle chart, left). The 11.5% drop in real imports of machinery and equipment point to a drop in business investment in Q3, not a surprising development given the prior quarter’s unsustainably hot pace (middle chart, right). Looking ahead to Q4, some sectors of the economy have potential for catch up. Production and real imports of autos have bounced back strongly in Q3, but those were put in inventories since exports stagnated in the quarter. So much so that inventories are tracking around 30% annualized growth in Q3 (bottom chart). With solid demand for autos in the final quarter of the year (if US October sales are any guide), expect those Canadian inventories to come back down and our auto exports to rise further. We saw a similar response in the first quarter of this year following inventory accumulation in the preceding quarter. Energy also has potential in the final quarter of the year, particularly given the partial rebound in Q3 (+11.4% versus the 22% drop in Q2). So, trade could provide some upside to the BoC’s Q4 GDP growth forecast (currently at only 0.8% annualized).