Merchandise Trade Analysis - December 2017

Canada's trade deficit widens as exports hold steady 

After a rebound in the auto sector fueled strong gains in November, there was little additional export growth in December. Driven by higher prices for energy and resources, total exports increased by 0.3 per cent in the final month of the year, reaching $46.5 billion for the month.

As was the case in November, export gains were eclipsed by an even larger increase in imports coming into Canada. A flood of purchases from the European Union drove total imports up 1.5 per cent in December to reach a record $49.7 billion for the month. As a result, Canada's trade deficit widened once again, coming in at an estimated $3.2 billion compared to a (revised) $2.7 billion in the previous month. Canada's monthly trade deficit is now at its highest level since September 2016.

The increases in imports and exports were driven by different effects. On the export side, growth was almost entirely the result of higher energy and commodity prices driving up the value of Canadian raw materials. Export prices rose by 1.4 per cent in December while sales volumes were essentially flat - rising by just 0.1 per cent. The opposite was true on the import side. Prices were, on the whole, unchanged compared to November, but the volume of imported goods rose by 1.0 per cent.

With the release of December data, the first estimates of year-end totals are now available. All told, 2017 was a reasonably solid year for Canadian exporters, in spite of some weakness in the final six months. Current numbers suggest that Canadian exports rose by 5.2 per cent last year to reach a record $549 billion (there will be some minor revisions to those numbers in the coming months).

Meanwhile, imports into the country were up by 4.7 per cent, hitting about $573 billion. As a result, Canada's trade deficit narrowed slightly in 2017, from $25.9 billion to about $24.0 billion.

Turning back to the monthly data, Canada's export story in December was one of strong gains in energy and mineral products offsetting losses elsewhere. Crude oil, natural gas and electricity exports were all higher, driving total energy export up by 6.2 per cent to end the year - an increase of about $494 million compared to November. Exports of raw metals and minerals were 8.0 per cent higher ($123 million), while processed metal and mineral shipments rose 7.7 per cent ($404 million).

For industrial and consumer goods, it was a different story altogether. Exports of industrial goods were down virtually across the board, and sales of finished consumer goods dropped by 8.4 per cent ($509 million). The decline in consumer goods exports was also widespread, as exports of food products, pharmaceuticals, and household goods were all lower in December.

In terms of international markets, December was an unusual month for Canadian exporters. The United States had been driving export growth through the fall of 2017, but that came to an abrupt halt in December. Southbound exports fell by 0.8 per cent - a decline of about $279 million dollars. Meanwhile, there were strong gains in a number of Canada's overseas markets. Leading the way on a dollar-value basis was Japan where exports were up by $165 million (17.6 per cent) compared to November. There were also significant gains in trade with India, Hong Kong, Turkey and Indonesia, as well as several countries in the EU.

On the import side, the 1.5 per cent increase in December was notable for the fact that it built on a remarkable 6.3 per cent spike in November. However, unlike the previous month, December's gains were not widespread, but concentrated in a few key product categories. Notably, energy imports into Canada were up sharply, increasing by 16.7 per cent ($434 million). There was also a solid increase in purchases of foreign industrial machinery, equipment and parts (6.3 per cent, or $299 million). At the other end of the spectrum, imports of aircraft and related parts fell by more than 23 per cent ($520 million). However, that decrease represented a return to more normal import levels after an unusual spike in November.

As noted at the outset, most of the increase in imports in December came from the European Union. Imports from that market were up by nearly 16 per cent ($755 million), led greater purchases of goods from Germany and the Netherlands. Meanwhile, imports from the US were down by 1.3 per cent ($416 million), echoing the decline in exports to that country.

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