Canada’s trade deficit declines more than expected

December 5, 2017 | Last updated on December 5, 2017
3 min read

Canada’s merchandise trade deficit narrowed more than expected to $1.5 billion in October, as exports improved for the first time since May.

Statistics Canada says Tuesday that exports increased 2.7% as imports fell 1.6% for the month, shrinking the country’s trade deficit compared with the $3.4-billion shortfall in September.

Economists had expected a deficit of $2.7 billion for October, according to Thomson Reuters.

“Some of that drop in imports was due to transitory factors in the auto sector, but the breadth of the import decline and what the details say about business investment suggest that much of the weakness reflected a weakening pull effect by the domestic economy on imports,” notes Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank, in a release.

Read: Canadians want to end provincial trade barriers: survey

TD Bank economist Dina Ignjatovic notes that the recovery in export volumes in October fully erased declines in August and September and provides a stronger handoff for the fourth quarter.

“Looking ahead, exports should manage to gain some traction, supported by a healthy U.S. economy and a Canadian dollar hovering around the 80 US cent mark,” says Ignjatovic. “Moreover, the strike at an auto assembly plant that weighed on exports through the first half of the month should lead to higher motor vehicle exports going forward.”

The BoC is scheduled to make its next interest rate announcement on Wednesday. The central bank is expected to keep its key rate target on hold at one per cent after raising it by a quarter of a percentage point twice earlier this year.

Ignjatovic wrote that the trade report, combined with last week’s Statistics Canada report that said 79,500 jobs were added in November, will be looked favourably upon by the BoC. “With most other areas of the economy evolving as expected by the bank, higher interest rates are not far off.”

Read: Straddles and strangles: a primer

Exports totalled $44.5 billion in October, as gains were made in nine of 11 sectors. Prices were up 1.5 per cent and volumes increased 1.2%.

Exports of basic and industrial chemical, plastic and rubber products gained 12.4%, while metal and non-metallic mineral products increased 4.5%.

Meanwhile, imports fell to $45.9 billion in October, mainly due to a drop in motor vehicles and parts which fell 8.1%. Import volumes fell 3.9%, while prices rose 2.4%.

Statistics Canada says passenger cars and light trucks were down 8.8% in October, while work stoppages and planned shutdowns in the automotive industry led to a sharp decrease in the demand for automotive components.

U.S. trade deficit up

Record imports lifted the U.S. trade deficit to $48.7 billion in October, the highest since January.

The Commerce Department says Tuesday that the trade gap rose 8.6% in October from $44.9 billion in September. Imports hit a record $244.6 billion in October, and exports were unchanged at $195.9 billion.

Read: Snapshot: U.S. economic data

A trade deficit means that the U.S. is buying more goods and services from other countries than it is selling them. A rising trade gap reduces U.S. economic growth.

So far this year, the U.S. is running a trade deficit of $462.9 billion, up 11.9% from January through October 2016. U.S. exports are up 5.3% this year; a weaker dollar has made U.S. goods less expensive overseas. Imports are up 6.5% the first 10 months of 2017.

The politically sensitive trade deficit in goods with China rose 1.7% to $35.2 billion from September to October and is up 7% this year to $309 billion.

In October, the U.S. ran a surplus of $20.3 billion with the rest of the world in services such as banking in tourism. But that was overwhelmed by a $69.1 billion deficit in the trade of goods.

Crude oil imports were up $1.5 billion in October. Imports of drilling and oilfield equipment climbed by $304 million, and imports of cellphones rose by $303 million.