MNI DATA ANALYSIS: Behind Cdn Record Trade Gap, Some Positives

By Yali N'Diaye

     OTTAWA (MNI) - Canada goods trade deficit reached a record high C$4.1

billion in March, widening from C$2.9 billion in February, which was slightly

revised from C$2.7 billion, leading to a deterioration of the balance in the

first quarter that does not bode well for net export contribution to GDP growth,

according to data from Statistics Canada.

     Overall the trade deficit widened to C$9.1 billion in the first quarter

from C$7.4 billion in the fourth quarter. In real terms, the deficit widened to

C$5.4 billion from C$4.0 billion.

     While the headline figure would appear to challenge the Bank of Canada's

sticking view that growth composition will shift towards greater reliance on

exports and business investment and less on consumer spending, details Thursday

had some positives to offer.

--EXPORTS STILL GREW

     The C$4.1 billion deficit was much larger than the C$2.3 billion that

analysts in an MNI survey had anticipated, but resulted from import strength

rather than export weakness.

     Exports indeed grew 3.7% on the month to C$47.6 billion, mainly as a result

of higher volumes (+3.0%).

     Gains were widespread across categories. Regionally, exports to the U.S.,

on which the Bank of Canada's scenario hinges, rose 1.2% in March after a 1.5%

gain in February, although strong imports resulted in a trade surplus with the

U.S. narrowing to C$1.7 billion, the smallest since June 2016.

     Aircraft and other transportation equipment (+24.3%), farm, fishing and

intermediate food products (+14.7%), and energy (+4.2%) contributed the most. 

     That being said, exports did slow over the quarter, when they rose 1.0%

after a 4.9% gain in the fourth quarter of 2017. In real terms, the picture was

also less supportive, with exports up just 0.3% after another modest 0.6%

increase the previous quarter.

     Exports of goods and services rose 0.7% in the fourth quarter, with a 0.9

point contribution to the 1.7% annualized real GDP growth. But imports rose

twice as fast (+1.5%), leading to a negative contribution of net trade.

--STRONG DOMESTIC DEMAND

     Imports soared 6.0% in March to a record C$51.7 billion, owing to strong

volumes (+5.3%) and widespread strength. 

     For the quarter as a whole, imports rose 2.1% after +3.7% the previous

quarter, with a real gain of 1.5% after +1.6%.

     Growing imports suggested domestic demand was solid in the first quarter,

with motor vehicles and parts (+8.3%) and consumer goods (+7.7%) leading the

gains.

     But particularly encouraging was the further increase in industrial

machinery, equipment and parts (+3.2% after +2.1% in February), a positive sign

for investment activity in Canada.

     However, the latter category was still down 2.8% in the first quarter after

a 5.5% quarterly gain in February.

--WAYS TO GO

     Overall the data actually supports the Bank of Canada's scenario of

stronger exports and business investment as growth composition shifts away from

consumer spending. That being said, the latter remains a significant support of

growth, which is likely to be verified again in the first quarter.

     Nonetheless, Thursday's data did not bode well for the net export

contribution to GDP growth, the weakening of which has already been factored in

by the central bank, which revised its annualized real GDP growth estimate to

1.3% for the first quarter, before rebounding 2.5% in the second quarter.

     "The positive trend in investment spending is expected to reassert itself

in the second quarter of 2018," the BOC said in its April Monetary Policy

Report. "Recent import data continue to signal robust growth of investment in

machinery and equipment," it added.

     Transportation disruptions in the first quarter should dissipate, allowing

for an export rebound in the second quarter, led by crude oil, the BOC said.

     In March, crude oil led the 1.2% increase in exports to the U.S., where

solid growth is anticipated to support Canadian sales.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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