PLANT

Trade deficit widens with June stats


August 11, 2010
by PLANT STAFF

OTTAWA: Merchandise imports and exports took a bit of a tumble in June widening Canada’s trade deficit with the world from $695 million in May to $1.1 billion.

The Statistics Canada trade report released Wednesday, coupled with a similarly weak reading south of the border, suggests the recovery in North America has entered a critical stage after a strong rebound earlier in the year.

“It’s just unfortunate that suddenly we are getting a whirlwind of reports that just a few weeks ago were looking strong, suddenly giving back that strength,” said economist Douglas Porter of BMO Capital Markets.

“As a strand-alone report I wouldn’t read much into the trade numbers but unfortunately it makes up a mosaic pointing the same way and that’s to more moderate growth.”

Porter said he has dropped his forecast for second-quarter growth in Canada from 2.7% to 2.3%, well below the Bank of Canada’s estimate of 3% and about one-third the pace of advance seen in the first three months of 2010.

Statistics Canada’s monthly report shows exports down by 2.5% from $34.4 billion in May to $33.5 billion. Prices contracted 1.2% and volumes declined 1.3%, the sixth consecutive monthly decrease.

Two-thirds of the drop comes from industrial goods and materials followed by energy products and automotive products. However, machinery and equipment exports showed a 3.7% gain.

The news was, if anything, worse in the US, which given a weak domestic economy has been counting on exports to keep its recovery on life-support.

The US trade deficit ballooned 19% to $49.9 billion in June, far more than anticipated and the highest since October 2008.

“This is spectacularly terrible,” Ian Shepherdson, chief economist with High Frequency Economics, wrote in a note to clients. “Sooner or later, imports have to drop back but in the meantime note that the June data… imply a downward revision” of 0.4% in growth.

Economists held out some hope that July would bring better results, particularly in Canada, where the auto sector appears to have had a good month.

But the double whammy, coupled with US Federal Reserve’s warning of slower growth ahead sent investors worldwide scurrying.

The Toronto and New York stock exchanges were both down over 200 points in morning trading, and the Canadian dollar fell more than a cent to 95.57 cents US.

Porter said the odds of a double-dip recession in the US, which would likely also sideswipe Canada’s recovery, had grown to more than one in five.

Imports declined from $35 billion in May to $34.6 billion, thanks primarily to lower imports of energy products. With energy out of the mix, imports actually edge ahead by 0.9 per cent. Higher imports of industrial goods and materials moderated the decline.

Import prices fell 1.2% although volumes held steady after four consecutive monthly increases.

Grant Bishop, an economist with TD Economics said in a report that with the pace of the US rebound slowing and consumer demand still shaky, a recent boost to certain export categories—in particular, auto exports—will not sustain. Market conditions in the European Union will also weigh on Canada’s export prospects. Further, the US “malaise” will put upward pressure on the loonie, which would place an additional drag on Canada’s trade competitiveness.

And the slowing pace of machinery and equipment imports does not bode strongly for business investment in fixed capital, he said. 

“We are certainly looking to Canadian firms to spur overall growth through the investment channel. M&E imports correlate strongly with quarterly business investment in M&E and the ebbing growth in this category flags that, even with low borrowing costs and flush profits, Canadian businesses remain cautious about capital investments,” he said. 

Here are some highlights from the Statistics Canada report:

• A weakness in energy sales helped to drag down exports to the US by 1%, but imports rose 0.8%. As a result, Canada’s trade surplus with the US narrowed from $3.4 billion in May to $3 billion.

• Exports to other countries fell 7%, largely a result of declining exports to the European Union and imports were down 4.6%, which widened the trade imbalance to $4.2 billion in from $4.1 billion in May.

• Exports of industrial goods and materials decline for a third straight month, down 7.1% to $7.3 billion. Precious metal exports were the big contributor, down 24.1%, followed by other crude non-metallic minerals and nickel ores.

• Energy products exports were down 5.5% to $7.4 billion, as volumes fell 5.2 per cent. This represented the fifth decline in volume in six months.

• A 21.9% increase in automotive exports in May gave way to a 4.6% decline to $5.2 billion in June as volumes decreased 5.9 per cent.

• Aerospace helped fuel exports of machinery and equipment, which increased 3.7% to $6.5 billion. Industrial machinery (engines, turbines, drilling and excavating) added to the increases.

• Energy products imports fell 19.3% to $3 billion, reflecting a 15% decrease in volumes. Crude petroleum, down 26.3%, led the decline with contributions from petroleum, coal and other related products.

• Imports of industrial goods and materials increased 2.1% to $7.5 billion on the strength of precious metals, such as gold, which increased 20.5 per cent.

Click here for Table 1: Principal trading areas

Click here for Table 2: Principal commodity groupings

PLANT, Files from Canadian Press