Canada's Merchandise Trade Surplus Rises

The merchandise trade surplus came in stronger than expected in August, rising to C$5.8 billion, although the surplus in July was revised down to C$4.2 billion (from an initially estimated C$4.9 billion). Expectations for August had been for a much smaller surplus of C$4.4 billion. The improvement in the August surplus occurred despite exports falling 1.6% as imports dropped an even greater 5.8%.

The decrease in imports was led by a 24.9% drop in the energy component. This was solely a reflection of volumes moving lower as prices were relatively flat, rising only 1.6%. Significant declines also occurred in the automotive component which fell 14.2% as a result of weakening sales.

The decline in exports was also mainly due to weakness in the energy component, which fell 9.7% and reflected the combination of declining volumes (-3.2%) and prices (-6.6%). The automotive component also fell in the month, although by a relatively modest 2.6%. Increases were recorded in other consumer goods (+4.9%), industrial goods (+2.8%) and machinery and equipment (+1.7%).

On a constant dollar basis, imports dropped 9.3% in the month reflecting the weakness in the energy component. Exports were down as well, but by a more modest 0.8%. As a result, the net export deficit on a volumes basis in August improved to $4.1 billion from a sizeable $7.8 billion in July.

The improvement in the August trade numbers on a constant dollar basis is encouraging. The average net export deficit so far in the third quarter remains considerably higher than the average deficit in the second. This implies that net exports remained a significant drag on growth in the third quarter because of the impact of a high Canadian dollar and weakening U.S. growth. These factors are expected to continue to weigh on growth given expected declining U.S. growth.

However, we are assuming that the domestic economy will continue to benefit from historically high commodity prices boosting income, which is expected to be sufficiently strong to keep overall GDP growth in the positive column.

RBC Financial Group
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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.