Canada's Merchandise Trade Surplus Narrows

Canada's Merchandise Trade Surplus Narrows

Canada merchandise trade surplus came in at C$3.8 billion in October, slightly larger than forecasts for a $3.3 billion overrun. September's surplus was revised to C$4.3 billion from an initially estimated C$4.5 billion. The narrowing in the October current dollar surplus reflected increases in both exports and imports, which rose 2.5% and 4.1%, respectively. In constant dollar terms, which measure the volumes of exports and imports after removing the effect of price changes, both fell in the month.

Current dollar imports rose for all major industry categories except the automotive sector, which saw a 1.7% decline on the back of a sharp slowing in demand for passenger autos. Similarly, exports increased in most industry groups and again it was the auto industry that saw a decline in activity in the month.

In constant 2002 dollars, imports fell by 3.6%, while exports fell at a milder 1.6% pace. The sharp drop in the value of the Canadian dollar in October (it lost 10.7% against the U.S. dollar according to StatsCan's calculations) boosted import prices from the United States in the month. Import prices rose 8% in October. Commodity prices also recorded a sharp drop in October and, with most commodity prices denominated in U.S. dollars, Canadian export prices rose by a smaller 4.2%.

The sharp drop in constant dollar imports in October outpaced the decline in export volumes, thus reducing the size of Canada's real trade deficit. We expect that the combination of the financial market crisis and deepening U.S. recession will continue to curtail export demand. Import demand in volume terms is likely to continue to weaken as well as Canada's economy softens.

On balance, after unexpectedly lending minimal support to the economy in the third quarter, we expect that net exports will act as a mild drag on the pace of growth in the fourth quarter as the weakening in U.S. demand exerts stronger downward pressure on exports in the final months of the quarter. Still, with Canada's economy coming under fire on the back of the recent weakening in the labour market and the sharp erosion in both consumer and business confidence, import growth will remain lacklustre.

The slowing in domestic demand in the third quarter is likely to continue, which combined with a modest drag from the trade sector, sets up for Canadian GDP to contract in fourth quarter. The Bank of Canada's aggressive 75 basis-point rate cut earlier this week was aimed at limiting the depth and duration of the economy's downturn. While our baseline view is that the Bank will hold the overnight rate at 1.50%, if the data indicate that the economy is headed for a protracted downturn, further interest rate cuts cannot be ruled out in the months ahead.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.