Canada's Trade Sector Supports Growth, but Drop in Imports a Worrying Sign

Canada's merchandise trade balance increased to $1.1 billion in March from an upwardly revised $0.3 billion in February, which was previously reported as $0.1 billion. Market expectations going into the release looked for a more modest $0.5 billion surplus. Both exports and imports were weaker than expected, with exports down 1.8%, while imports fell at a quicker 4.4% pace.

The weakness in exports reflected a fall in sales to the United States with exports of machinery and equipment and automotive products accounting for about two-thirds of the monthly decline. This was a partial reversal of gains reported in February. Exports of trucks and parts declined in March, although passenger car exports increased for the second month running. Exports of energy goods were also lower, with petroleum and coal and natural gas volumes falling. Imports of energy products also suffered, falling 18.4% in the month to the lowest level since October 2004. Imports of machinery and equipment and industrial goods slipped. On a constant dollar, or volumes basis, exports fell 2.2%, while imports slumped at a greater 4.1% pace.

After February's bounce, exports slipped again in March, building on the marked weakness in January and pointing to a sizeable drop in the first quarter, with RBC forecasting a decline of about 30% at an annual rate. Imports are likely to record an even-larger drop, however, which points to an improvement in the net export balance.

While the data suggest that the trade sector was supportive of growth in the quarter, it was due to another marked drop-off in imports, a worrying sign of weak Canadian demand. The tone in other domestic data also points to a very soft quarter for growth for Canada's economy. Despite a more moderate dip in GDP in February, the sharp drops in activity in December and January points to real GDP contracting at a record-breaking 6 ½% annualized rate.

The Bank of Canada's forecast of a 7.3% annualized decline is even more dire and is consistent with policymakers keeping policy extremely accommodative. While the Bank provided a simple framework for a made-in-Canada version of credit and quantitative easing programs, its assessment was that implementation of these programs was not required in April, although policymakers will review their stance at their next fixed action date on June 4th.

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.