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Posted August 7, 2018


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International Trade

Canada: International trade (June)

Export growth nearly erases trade deficit; net trade set to boost Q2 GDP growth.

The trade deficit declined to -CAD 0.6bn in June from -CAD2.7bn, and was smaller than the expected -CAD2.3bn. In additione exports rose by 4.1% in the month on increased volumes and higher export prices. Imports fell by 0.2% month-on-month and US tariffs on steel and aluminium led to a 23.2% drop in real exports of iron and steel.

The trade deficit narrowed to -CAD 0.6bn in June, from -CAD 2.7bn prior. The consensus expectation was for a trade deficit of -CAD 2.3bn.

The CAD 2.1bn narrowing in the trade deficit was primarily due to a CAD 1.2bn increase in the energy trade surplus, and a CAD 0.8bn swing in the aircraft trade balance from deficit to surplus. An increase in the value of oil exports, and a decline in imports of refined petroleum products explain the increase in the energy trade surplus.

The value of exports rose by 4.1% to CAD50.1bn, a record high. The increase in exports was the result of a 2.1% increase in real exports and a 2.0% increase in export prices. Imports fell by 0.2% to CAD 51.3bn, as real imports fell by 1.2%, and import prices rose by 1.0%.

The trade surplus with the United States rose CAD 0.8bn to CAD 4.1bn, its highest level since April 2017, on increased energy exports. Notably, the non-US trade deficit narrowed to -CAD 4.7bn from the prior -CAD 6.1bn

Implications

The June trade report confirmed a strong quarterly performance for Canadian exports. Overall, merchandise exports are reported up at an annualized pace of 16% in Q2, which is the best quarter for exports since mid-2014. Merchandise imports, while down in June, still rose at an annualized rate of 6.8% in Q2. As a result, net trade is set to provide a solid positive contribution to GDP growth in Q2.

While the recent performance of exports is encouraging, we see two reasons for restrained optimism. First, it is far from clear that the recent upswing in real non-energy exports has set the stage for sustained positive growth. Real non-energy exports have yet to rise above their January 2016 level. This suggests to us that competitive headwinds have not yet fully abated.

Second, while energy exports have been strong, the key driver of these exports gains were investment decisions made years ago. That is, the increase is not primarily due to current oil prices or rising demand for Canadian energy exports. For example, Alberta oil production and exports have been rising as new projects come on-line. Similarly, the Hebron oil project in Newfoundland began to produce oil in November 2017, and production has increased sharply in recent months. The decision to proceed with the Hebron project was made in 2013, when oil prices were around USD100/bbl.

US trade policy uncertainty is also a source of concern. In fact, there are signs that US trade policy actions are affecting cross-border trade. For example, real exports of iron and steel fell by 23.2% in the month as the US imposed tariffs on imports of Canadian steel and aluminium. This represents a sharp reversal from the upswing that had been in place since mid-2016. There are also other signs of US trade policy affecting trade performance. For example, the US has imposed tariffs on imports of Canadian newsprint, and softwood lumber. The tariffs have had a negative impact on real exports of lumber products.

In recent months real lumber exports have been recovering, though they remain below the level observed in early 2017, prior to the imposition of US imposed tariffs on imports of Canadian forestry products. Nonetheless, the rebound in lumber exports, and rising lumber prices have helped lift the trade surplus in forestry products back above CAD2.0bn, its highest level in a decade.

David Watt is Chief Economist, Canada HSBC






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