MNI ANALYSIS: Canada Heads For Record Non-US Trade Deficit

--Record Overseas Merchandise Deficit Masked By U.S. Surplus

By Anahita Alinejad and Greg Quinn

     OTTAWA (MNI) - Canada has never been so uncompetitive on overseas trade,

and is on track to post the largest annual deficit with non-U.S. destinations on

record as the country's central bank frets about the strength of the local

dollar.

     The non-U.S. shortfall swelled to C$46.6 billion from January to August,

according to Statistics Canada figures. That's larger than C$43 billion in the

same period last year, which is now the second largest on record.

     Disappointing exports and businesses moving investments abroad are the

culprits behind slow growth preventing the Bank of Canada from normalizing

interest rates in an economy it says is near full capacity. The overall trade

balance has been in deficit for most of the last five years as weakness in

overseas sales overwhelms surpluses with the U.S.

     BOC Governor Stephen Poloz, previously chief economist at the federal trade

bank, pointed out overseas competition as he signaled a potential rate cut.

Poloz told reporters Wednesday the Canadian dollar's strength against non-U.S.

currencies is a challenge, and he expects exports to decline in the second half

of the year. The BOC's index of Canada's dollar against non-U.S. currencies

climbed from 116.3 at the end of last year to 123 last week, or by 5.8 percent.

     "While we have been fairly steady with the U.S., we have been appreciating

against a lot of other currencies. And so it's on those margins where people are

mentioning well it's a little harder to compete," Poloz said.

     For the last three years, China, the EU and Mexico have rung up the widest

monthly trade surpluses with Canada. Lesser-known trade rivals such as Peru and

Switzerland are also starting to notch up large or growing imbalances.

     --DEFICITS RISE DESPITE TRADE DEALS

     It's dismal news for federal governments that have touted new free trade

pacts as a way of reducing dependence on the U.S. to buy its oil, cars and farm

products. Businesses have complained that bad policies from higher minimum

wages, restrictions on energy development and over-regulation are holding them

back.

     Gold imports from Peru, various goods from China, crude oil from Russia,

auto engines and parts from Spain and autos from South Korea are behind the

non-U.S. import growth this year, a Statistics Canada official told MNI. The

reason for higher non-U.S. deficits is "a very complex question that can't be

answered just by using trade data," the official said.

     Canada's monthly deficit with the EU has averaged C$1.46 billion since the

CETA trade pact took effect in September 2017, up from C$955 million in a

similar timeframe before the agreement.

     Even Switzerland is winning: Canada's monthly deficit there widened to

C$594 million in July. It was less than half that two years earlier. Peru also

shows a sharp gain in trade, with Canada swinging from a small surplus in August

2018 to a deficit of C$291 million in the latest report.

     Growing imbalances reflect strong household spending that has made Canada a

star amid global trade tensions, and also troubling weakness in historic

industries such as automobiles and chemicals. Consumer products have swelled to

monthly deficits of C$4 billion since 2017, likely supplied in large part by

China, and there is also a large shortfall in electronics.

     Automobiles used to be one of Canada's biggest export strengths, but that

industry has recorded monthly deficits of at least C$1.5 billion since July

2017. Chemical products have tumbled over the last five years and the deficit

reached C$925 million in the last report. The next trade figures are out Tuesday

at 08:30 am from Ottawa and cover the month of September.

     "To reduce the steady flow of red ink in trade, Canada either needs a

stunning reversal of its competitiveness, or more likely, a weaker exchange rate

against its U.S. and overseas competitors," CIBC economists led by Avery

Shenfeld wrote in a research note.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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