Highlights:
- Canada’s merchandise trade deficit roughly doubled to $1.1 billion in May from $0.55 billion in April as a jump in imports more than offset higher exports.
- The 1.3% nominal increase in exports was fairly broad-based with 8 of 11 major subsectors posting gains.
- Special factors were also at play with an 11% jump in exports of metal and non-metallic mineral products attributed to a transfer of gold assets within the banking sector. That increase was offset by a price-driven drop in crude oil exports.
- Forestry product export volumes fell 5% in May following imposition of duties on Canadian softwood lumber in late-April.
- Nominal imports were up 2.4% in May with half of the increase coming from aircraft imports.
Our Take:
There is a lot of noise to filter through in today’s trade report but we think the message on exports is ultimately positive. Non-energy export volumes, even excluding a transitory jump in gold exports, posted a solid increase in May and are now up relative to a year ago. A price-related decline in oil exports belies what has been a fairly strong increase in energy export volumes year-to-date. That supports the Bank of Canada’s view that adjustment to lower oil prices is now largely complete. May’s trade data is consistent with our expectation that net exports will add about 1 1/2 percentage points to GDP growth in Q2.
There are reasons to expect an upward trend in Canadian exports will continue. Global trade growth is picking up alongside stronger economic activity and other drivers such as US industrial production and business investment have improved year-to-date. Recent surveys from the Bank of Canada and Export Development Canada showed improving sentiment among exporters as strong orders make up for uncertainty regarding US trade policy. The Bank of Canada’s latest view seems to be that, while uncertainty is clouding the outlook, monetary policy decisions can’t be held off in the face of concerns that could linger for some time. As such, we don’t see the threat of trade policy changes, including upcoming NAFTA renegotiation, preventing the bank from raising the overnight rate next Wednesday.
