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The Quick Take: June 6, 2018

Merchandise Trade Deficit Narrows in April

Doris Chu
Senior Economist
National Forecast

“Although April’s merchandise trade numbers are encouraging, the uncertainty surrounding NAFTA and rising protectionism will continue to negatively impact the sector’s prospects and performance over the near term.”

In real terms, exports increased by 1.2 per cent while imports declined by 2.4 per cent, suggesting the trade sector will likely be a contributor to overall economic growth in the second quarter of 2018.

However, continued uncertainty surrounding the North American Free Trade Agreement (NAFTA) and rising protectionist measures will dominate the outlook for Canada’s trade sector over the near term. With NAFTA renegotiations stalling at the end of May, the U.S. followed through with its threat of imposing 25 per cent tariffs on steel imports and 10 per cent on aluminum on June 1.

The increase in merchandise exports in April was the sixth increase within the past seven months. Nominally, exports rose by 1.6 per cent in April to reach a record $48.6 billion. This was underpinned by strong exports of unwrought precious metals and precious metal alloys. Higher exports of consumer goods and energy products also contributed to the monthly export increase.

On the other hand, imports declined by 2.5 per cent in April. The monthly drop was widespread, driven in large part by a 5.8 per cent decline in imports of motor vehicles and parts. This was partly offset by higher imports of energy products as temporary closures in Canadian refineries led to a boost in imports of motor gasoline and diesel fuel.

With exports outpacing imports by a wide margin, Canada's merchandise trade deficit shrunk from $3.9 billion in March to $1.9 billion in April.

Much of this improvement came from an increase in Canada’s trade surplus with the U.S. which widened from $2.0 billion in March to $3.6 billion in April. This marks an end to five consecutive months of the Canada–U.S. trade surplus shrinking. The increased surplus was fueled by strong export growth of 3.2 per cent driven by higher shipments of crude oil and crude oil bitumen.  At the same time, lower imports of motor vehicles resulted in imports from the U.S. declining by 1.4 per cent.

Canada’s trade deficit with the rest of the world also shrunk mildly from $6.0 billion in March to $5.5 billion in April, as exports declined by 3.0 per cent and imports contracted by an even greater 4.3 per cent.

Despite the positive trade reading this month, Canada’s trade sector remains on shaky ground. We expect the Bank of Canada to remain cautious in the timing of future rate increases, although we still expect one more rate increase this year.

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