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Merchandise Trade Deficit Shrinks in January

Mar 07, 2018

The Conference Board of Canada’s Senior Economist Doris Chu and Director Matthew Stewart offer the following perspectives/insights on today’s merchandise trade data release:

Quote

“Although Canada’s trade deficit shrank in January, the story was largely disappointing as both export and import volumes registered declines. With softer consumer and investment spending expected this year, hopes of the trade sector making a larger contribution to economic growth are looking less likely. While the U.S. economy is doing well and declines in the Canadian dollar are making our goods more competitive, the trade sector continues to face a multitude of challenges and uncertainties that will weigh on the sector’s growth potential,”
—Matthew Stewart, Director, Economics, The Conference Board of Canada.

Insights

  • Merchandise exports declined by 2.1 per cent in January. Exports are now lower than they were this time last year, suggesting the trade sector is unlikely to take over from the consumer as the main driver of economic growth this year.
  • Even more concerning was the decline in export volumes. Merchandise export volumes contracted by 3.6 per cent in January. The declines in motor vehicle and parts, aircraft, and forestry product exports continue to highlight the struggles in the non-energy sector. Temporary plant closures were largely responsible for the lower exports of motor vehicles, while the U.S. Department of Commerce’s collection of import duties on Canadian lumber restricted wood exports.
  • Despite the decline in exports, Canada’s merchandise trade deficit shrank to $1.9 billion, down from $3.1 billion in December, as imports fell by an even larger amount than exports.
  • Declines in imports were widespread, with lower imports of industrial machinery and equipment leading the way. New regulations on off-road diesel engine and machine emissions that came into effect at the start of January likely played a role in limiting machinery imports. Lower imports of industrial machinery and equipment is discouraging as it suggests ongoing weakness in business investment.
  • Exports to the U.S. declined by 2.9 per cent as exports of motor vehicles and aircraft fell. However, a larger decline in imports reduced Canada’s trade surplus with the U.S. to $3.1 billion down from $3.6 billion in December.
  • Exports to the rest of the world saw a small increase in January, but not enough to make up for the decline in sales to the United States. Canada’s deficit with the rest of the world shrank to $5.0 billion, down from $6.6 billion in December.
  • Todays trade numbers and the threat of new trade measures suggests the Bank of Canada is likely to delay further rate hikes. We now expect the Bank will hike interest rates only once more in 2018.