Quick take

Trade Balance Tightens

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Canada's merchandise exports declined by 2.8 per cent (month-on-month) in July, while imports dropped by 1.8 per cent. As a result, Canada's merchandise trade surplus with the world narrowed from $4.9 billion in June to $ 4.1 billion in July.

Total exports declined (-2.8 per cent) for the first month after six consecutive months of steady increase to settle at $ 68.3 billion in July. Exports of energy products fell 4.2 per cent in July, the first monthly decrease of the year. On a volume basis, however, crude oil exports were up for a second consecutive month in July.

Total imports decreased by 1.8 per cent to $ 64.2 billion. Imports of energy products fell 10.2 per cent following a price surge in June. While imports of consumer goods were down 4.2 per cent a third consecutive monthly decline. Nevertheless, higher imports of motor vehicle parts (+8.4 per cent) partly offset the decrease in total imports.

Exports to the United States decreased for the first time in seven months. Exports to the United States fell by 2.2 per cent in July. Meanwhile, imports from the United States increased by 0.7 per cent. As a result, Canada's trade surplus with the United States narrowed from $13.3 billion in June to $11.8 billion in July.

Key Insights

The slight decrease in the trade balance should not spark any jitters. The reduction in the trade balance this month is largely driven by the drop in oil prices. The decrease in oil prices over the past couple of months is driven by a few factors. First, is the global macro malaise. There are looming fears of a recession, and this is slowing down growth globally. Second, there is a slowing of economic activity due to interest rate hikes. Third, the slowdown in factory activity in China due to COVID-19 measures has lowered the demand for oil globally. While the duration of these lockdowns is unknown, the zero-tolerance policy is likely to keep pressure on oil prices down for the foreseeable future.

More than 70 cities in China have been placed under full or partial Covid lockdowns. Due to the Chinese government's zero-COVID stance and the relatively low vaccination rate of the elderly in China, widespread mobility restrictions may continue to occur in major cities weighing on household consumption and might further disrupt supply chains in the near term. With China’s unrivalled position in global trade and as a key manufacturing centre, we are likely to experience some downstream effects on supply chains in the coming months. This, however, will put less pressure on freight and will help deal with the backlog of goods waiting to be transported and freight costs in the coming months.

The Canada-U.S. softwood lumber dispute has become one of the most enduring trade disputes between both nations. On August 4th, the U.S Department of Commerce announced that it would cut the tariff on most Canadian softwood lumber imports from 17.91 per cent to 8.59 per cent. This rate took effect late last month (August). This is one step in a protracted dispute dating back to the 1800s, with the latest dispute introduced in 2017 during the Trump administration. Lowering the lumber tariff should increase the demand for Canadian softwood lumber over the coming months.

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Momanyi Mokaya

Momanyi Mokaya

Research Associate

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