Merchandise Trade Analysis – June 2016

Record trade deficit distracts from modest improvement in export performance

While newspaper headlines focused on Canada's record trade deficit in June, the underlying numbers held some reason for optimism. Overall, exports rose by 0.6 per cent in June - a small increase to be sure, but nevertheless Canada's strongest export performance since January. That growth was eclipsed, however, by a 0.8 per cent increase in imports. As a result, the trade deficit rose from $3.5 billion in May to a new all-time high of $3.6 billion in June.

Canadian Trade Summary
  Apr-16 May-16 Jun-16
Value ($billions)
Exports 41.5 41.2 41.4
Imports 45.0 44.7 45.0
Trade Balance -3.5 -3.5 -3.6
       
Percentage change
Export prices 0.1 1.5 0.8
Export volumes -0.3 -1.9 -1.4
Import prices -0.2 1.0 0.2
Import volumes 1.1 -0.9 0.6

The record trade deficit and Canada's generally weak export performance so far in 2016 is almost entirely the result of the ongoing impact of crude oil prices. For many years, Canada has had a large trade surplus in crude oil which offset a significant trade deficit elsewhere. There remains a large trade surplus in crude oil, but because Canada's crude oil exports are worth less today, that surplus is about half the size it was two years ago. As a result, Canada's trade balance has gone from a $1.5 billion surplus in mid-2014 to a $3.6 billion deficit today.

This is not to say, however, that we should not be concerned about Canada's export performance. After solid growth through much of 2015, there has been a stark deterioration in non-energy exports, which have fallen 11.6 per cent since January. Much of that drop has been because of a sudden reversal of fortune in exports of motor vehicles and parts. Foreign sales of those products rose by nearly 37 per cent from February 2015 to January 2016, but have since fallen by 16.0 per cent.

That trend continued in June with a 1.6 per cent decline - the fifth consecutive month of lower auto sector exports. However, the weakest export performance that month was in metals and mineral products which fell 6.9 per cent. There were also modest declines in machinery and raw metals.

Even so, the gainers outnumbered the losers in June. Buoyed by higher prices, energy export were up 7.2 per cent in June, while chemicals, plastics and rubber products were 5.2 per cent higher. There were also smaller increases in foreign sales of agricultural products and consumer goods.

Higher energy prices should have helped to reduce Canada's trade deficit in June, but the impact was eclipsed by a more dramatic event: the wildfires in and around Fort McMurray. Forest fires shuttered oil production and disrupted refinery activity in the province. Those factors contributed to a massive 30.8 per cent spike in refined petroleum imports into Canada. Removing this impact improves Canada's trade picture somewhat - the trade deficit not including refined petroleum fell from $3.6 billion in April to $3.3 billion in May and then $3.2 billion in June. With production gradually returning to normal, July's trade data should show additional improvements in export totals, as well as a lower trade deficit.

In addition to refined petroleum, there was a surge in Canadian purchases of foreign-made vehicles and parts, which rose 3.6 per cent in June. Imports of electronics also jumped 3.1 per cent. On the other side of the equation, imports of aerospace vehicles and parts fell by 22 per cent, while shipments of agricultural goods, forestry products, construction materials and metal products were also lower.

In terms of major export destinations, the largest growth was in sales to the UK, which rose by $274 million in June. That increase recovers most of the losses from an unexpected drop in exports to that country in May. Exports to Spain, South Korea and China were all higher as well.

Meanwhile, exports to the US fell by $394 million in June, due to the combination of lower exports of vehicles and parts, as well as refined petroleum.

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