Revisions Move Canada’s Trade Calance to Deficit

Fundamental analysis of Forex market

Canada posted a surprise -$0.42 billion trade deficit in September, defying expectations for a $0.2 billion surplus. This follows a revised -$0.55 billion deficit in August (previously reported as a $0.53 billion surplus).

The narrowing of the deficit in September was driven by declines in imports (-0.4%) outpacing those in exports (-0.2%), The move to a deficit is the result of a significant upward revision to August’s imports, caused by the late reporting of three high-value ships (icebreakers from Sweden) that drove overall transportation sector imports up.

In real terms, the slumps were more pronounced, with import volumes falling 1.5% and export volumes declining 1.2%.

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The decline in imports was mostly led by a drop in aircraft and other transportation equipment (-28.3%) due to a decrease in the imports of ships (noted above). Energy imports were also down 11.5% on the month, led by a decline in both crude oil imports (-13.2%) and refined petroleum products (-18.9%). Imports fell in five out of the 11 sectors.

Exports were mixed, with six out of the 11 sectors posting declines. The decline was mostly led by a pullback in consumer goods exports (-3.9%) which was mostly centered in food, beverage, and tobacco products (-5%). Energy exports provided somewhat of an offset, moving up 2.3% on the month, with a notable increase in refined petroleum energy products (10.6%).

Canada’s merchandise trade surplus with the U.S. narrowed to $4.8 billion in September, as a imports (1.2%) increased more than exports (0.4%).

Key Implications

This was a disappointing print, boosted further by the significant revision to August’s data. For the third quarter as a whole, import volumes were down 1.2%, whereas exports volumes also fell a less drastic 0.3%.This leaves our third quarter GDP tracking at 1.8%, just in line with the Bank of Canada’s estimate. Nevertheless, the broad-based declines in both exports and imports confirms the slowing momentum narrative, both domestically and globally.

It is worth noting that the Bank of Canada upgraded the contribution of exports to overall growth in its latest Monetary Policy Report for 2018 and 2019 – a welcome development if realized and one which is likely still possible given strong performance in Q2. Going forward, strong U.S. export demand, greater trade certainty with USMCA, and a lagging Canadian dollar should support the export sector.

Steel and aluminum tariff negotiations are still ongoing, with Foreign Minister Freeland recently indicating that the negotiations are completely separate and independent from the USMCA agreement, albeit hinting that the agreement has provided “positive momentum.” Any resolution to these tariffs should provide an added boost to positive sentiment generated by the removal of NAFTA uncertainty.