Canadian Trade Surplus Narrows in July

• Canadian trade surplus narrows to $4.9 billion
• Auto imports jump 9.5%

The Canadian trade surplus for July came in well below expectations, shrinking to $4.9 billion from a downwardly revised $5.6 billion in June. The decline stemmed from a 4.6% surge in imports, which more than doubled the 2.2% rise in exports. But contrary to the past few months, price effects were not largely responsible for this growth. Indeed, the volumes of both imports and exports grew in July, but again, import growth (+3.2%) outpaced export growth (+0.7%). Still, after declining in 3 of the past 4 months, the fact that export volumes increased on the month is good news.

For the first time in 8 months, the export sector was not buoyed by energy products. Energy exports fell by 1.5% in July, led by a drop in crude petroleum and electricity exports. In real terms, volumes of energy exports shrank for the fourth time in five months, which is consistent with a slowdown in demand from the U.S. as well as on a global scale.

Instead, July's export strength stemmed from a 6.6% jump in machinery and equipment and a 5.0% rise in industrial goods and materials. While machinery and equipment exports remain below 2007 levels as has been the case all year, industrial goods and materials exports have been on an upward trend since the start of the year, and now sit 10% above year-ago levels - largely due to higher prices. The automotive sector (+2.4%) also helped buoy exports, rising for the second consecutive month. Still, automotive products are down 17% from year-ago levels.

On the import side, gains were seen across the board, led by a 9.5% increase in the automotive sector, as robust demand for autos during the first half of the year drove imports of passenger vehicles and trucks up 21% and 8% respectively, in July. Imports of industrial goods and materials (+6.1%) and machinery and equipment (+2.9%) also contributed to import growth. After at massive 29% jump in June, energy imports grew by a modest 2.4% in July.

Although this morning's report did have some bright spots - showing growth in both export and import volumes - the fact that real imports outpaced real exports implies that trade weighed on real GDP growth for the fifth straight month in July. Also, given that commodities account for a large portion of Canadian exports, the pullback in prices throughout the commodity complex since mid-July will be a drag on both exports and Canada's trade surplus in the near term.

TD Bank Financial Group

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