Highlights:

  • The Canadian trade deficit widened to $1.2 billion in October from a revised $0.9 billion shortfall (previously reported as $0.4 billion) in September.
  • Lower Canadian oil prices were the main factor weighing on the balance in October. Excluding price-effects, the trade balance in volume terms improved somewhat.

Our Take:

A wider trade deficit was not unexpected with Western Canadian oil prices continuing to fall in the month. Controlling for what ended up being a 10% drop in the price of energy exports, the trade balance in volume terms improved somewhat. Export volumes increased 1.4% on relatively widespread gains — although led by a big 4.8% jump in motor vehicle and parts shipments. Non-energy exports were up 2½% from September and closer to 7% from a year-ago. Imports volumes were softer, holding steady following four straight monthly declines, but despite an increase in equipment imports that is a good sign for near-term business investment.

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Of course, trade is not the only concern at the moment for the Bank of Canada. Western Canadian oil price spreads have begun to narrow, even before announced mandated oil production cuts in Alberta in 2019, but lower global benchmark prices have added to concerns of another round of retrenchment in the oil sector. At the same time, soft details underlying the 2.0% increase in Q3 GDP — including slower household spending growth, particularly for interest-rate sensitive purchases like cars and houses —arguably leave less urgency for further interest rate hikes to keep consumer debt from getting further out of hand. The economy still looks to be operating close to capacity. Reports of labour shortages haven’t all of a sudden disappeared and underlying inflation trends still appear to be anchored right around the central bank’s 2% inflation target. And the Bank of Canada reiterated its view yesterday that it will still be appropriate for interest rates to move higher from still-low levels to more of a ’neutral’ policy stance over time. Nonetheless, recent developments have lowered the odds that the next central bank rate hike will come in January.

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