HomeContributorsFundamental AnalysisCanada's Deficit Widens in February, COVID-19 Impacts to Show in the Months...

Canada’s Deficit Widens in February, COVID-19 Impacts to Show in the Months Ahead

  • Canada posted a $983 million trade deficit in January, down from a revised $1.7 billion deficit in January (previously reported as a $1.5 billion deficit). The narrowing in the deficit was driven by a modest 0.5% increase in exports (m/m), while imports fell 0.8%.
  • After stripping out price impacts, the export picture was stronger, with volumes up 2.7%. Import volumes were down 1.2%.
  • The increase in exports spanned eight of the 11 major sectors, but the headline strength was driven primarily by the volatile aircraft and other transportation equipment category (+18.5%). Exports of motor vehicles and parts were also strong, increasing 3.1% in February. Providing some offset were lower exports of energy products, which fell 7% on account of lower oil prices. Excluding aircraft, overall exports were down 0.3%.
  • Imports were down in seven of the 11 industries. The drop was mainly driven by a 16% decline in energy product imports. Providing some offset was a spike in imports of aircraft and other transportation equipment (+27.3%). Excluding the aircraft category, overall imports were down 2%.
  • Canada’s merchandise trade surplus with the U.S. widened from $3.4 billion in January to $3.7 billion in February. Its merchandise trade deficit with the rest of the world narrowed to $4.7 billion (from $5 billion in February), with imports (-5.6%) falling more than exports (-5.3%).

Key Implications

  • Today’s international trade release only provides a glimpse of the COVID-19 and oil price shock impacts. Overall exports were up, but exports to countries other than the United States were down 5.3%. It is also important to note that both sides of the ledger were disproportionately impacted by a spike in the volatile aircraft category. Today’s data release, therefore, doesn’t alter our view that the Canadian economy was on a weak footing heading into the COVID-19 outbreak.
  • Indeed, COVID-19-related disruptions in February were mostly centered in China and neighboring countries in Asia where Canada has relatively lower trade exposure. The outlook for trade will likely deteriorate markedly in March and April as the “sudden stop” in economic activity and related supply-chain disruptions spread to more countries – namely the U.S., Canada’s largest trading partner.
  • Importantly, the commodity price shock will also change Canada’s trade landscape in the quarters ahead. The nosedive in oil prices will impact Canada’s nominal exports and its terms of trade, which will weigh on national income. A lower Canadian dollar should be mildly supportive for exports. Unfortunately, disruptions to global trade due to COVID-19 containment efforts will likely temper the impacts of the recent depreciation in the Canadian dollar.
  • Policymakers and the Bank of Canada have announced a range of measures in the past few weeks aimed at providing bridge support to households and businesses through the COVID-19 shock. For small businesses that export, this includes the Business Credit Availability program, which will be administered through Export Development Canada.
TD Bank Financial Group
TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

Featured Analysis

Learn Forex Trading