Merchandise Trade Analysis – December 2016

Higher energy prices drive export growth in December

Canadian exporters ended 2016 on a positive note as higher prices for crude oil and natural gas drove total monthly exports to record levels in December. Overall international sales were up by 0.8 per cent compared to November, reaching $46.4 billion. Adding to the good news, November's trade figures, which were unambiguously strong to begin with, were revised even higher - from $45.6 billion to $46.1 billion. Exports have now increased in six of the last seven months.



The upward revision in November's export totals meant that the trade surplus that month - Canada's first in well over two years - was even larger than initially thought. The positive trade balance of $527 million nearly doubled, hitting just over $1.0 billion. In December, that surplus narrowed slightly as growth in imports (up 1.0 per cent) slightly exceeded the increase in exports. As a result, the trade surplus fell slightly to about $923 million.



While November's export gains were strong and broad-based, the increase in December was almost entirely the result of higher energy prices. Prices for crude oil, refined petroleum and natural gas were all significantly higher in December. Even though crude oil and natural gas sales volumes were essentially flat, producers received much better prices for those goods, helping to fuel overall export gains.



In fact, outside of the energy sector, Canada's export performance was not particularly, strong. Overall export volumes were down 1.4 per cent, while energy drove overall export prices higher by 1.2 per cent. On the import side, Canadians bought more foreign goods in December (import volumes were up 0.4 per cent), helped by the fact that those goods were slightly cheaper (import prices fell by 0.2 per cent).

Canadian Trade Summary
  Oct-16 Nov-16 Dec-16
Value ($billions)
Exports 43.5 43.7 45.6
Imports 47.7 44.8 45.1
Trade Balance -1.5 -1.0 0.5
       
Percentage change
Export prices 0.6 1.5 0.4
Export volumes -1.9 -0.7 3.5
Import prices 0.9 0.9 1.2
Import volumes 1.4 -6.2 -0.3


At the industry level, there was actually little cause for rejoicing outside of the energy sector. Energy product exports jumped by almost 16 per cent in December, but most other major industrial sectors saw lower export numbers. Shipments of motor vehicles and parts fell by 5.2 per cent compared to November and have dropped by 10.7 per cent since July. Raw metals and minerals exports were down 12.6 per cent in December and foreign sales of products made from those materials were also down by 3.8 per cent. Producers of industrial machinery and electrical/electronic products also saw international sales drop markedly.

Aside from energy, the only bright spots for exports were in consumer goods and aerospace. After a tepid performance through much of the year, aerospace deliveries rose for the second month in a row in December (up 7.7 per cent), while exports of consumer goods were 2.6 per cent higher.

In terms of export destinations, there was a spike in sales to a number of Canada's smaller trading partners. Exports to Switzerland more than doubled compared to November, while there were very strong gains in shipments to Spain, Saudi Arabia, Algeria, Russia and Peru as well. At the other end of the spectrum, there was a sharp decline in deliveries to the major shipping ports of the Netherlands and Hong Kong. Exports to Norway, Turkey, and several countries in Asia were also down.



Canadian exports to the United States were relatively flat in December - rising by just 0.2 per cent. Considering that the US is effectively Canada's only customer for energy products, this modest growth suggests a significant decline in non-energy exports to that country.



In many cases, imports into Canada were a mirror image of exports. The spike in exports of energy products coincided with a sharp decline in imports of those same goods. Meanwhile, there was a significant increase in purchases of foreign metals and minerals, as well as industrial machinery. Only transportation equipment trade trended in the same direction in December. Canadian imports of motor vehicles and parts were down, while imports of aerospace vehicles and parts were up considerably.

2016 In Review
While 2016 ended on a relatively high note, it was, on the whole, a disappointing year for Canadian international trade. Some end-of-year adjustments are still to come, but preliminary numbers suggest that total exports were valued at about $521.1 billion last year - a decline of about 0.7 per cent compared to 2015. Imports were also lower, falling by 0.1 per cent to $547.2 billion.

Two months of trade surpluses at the end of the year helped to soften the blow, but Canada still posted a record-high trade deficit in 2016. In total, imports exceeded exports by $26.1 billion eclipsing last year's low of $23.0 billion.



More concerning still is Canada's trade balance relative to the value of goods we buy and sell in international markets. In the same way as a large credit card bill matters less if your income has grown significantly, a record trade deficit is much less of a concern if it represents a small share of total trading activity. Unfortunately, that is not the case here. Expressed as a share of overall two-way trade, Canada's trade deficit reached 2.4 per cent in 2016. Comparable data only goes back to 1988, but that is still the largest trade gap Canada has seen in that time.

The mollifying factor in all this is that it is no secret why 2016 was a poor year for international trade in Canada. The drop in energy prices in 2015 and into 2016 drove down the value of some of Canada's most important export products. The value of crude oil deliveries fell by 14.4 per cent. Natural gas export were 11.1 per cent lower, and refined petroleum exports plunged by just over 34 per cent. Removing those products improves the export picture for 2016. Outside of those three products, Canadian exports rose by 2.2 per cent last year.



Unfortunately, the outlook for exports in 2017 is decidedly mixed. On the positive side, a recovery in energy prices will go a long way towards improving overall export growth this year. However, 2017 will be a year of profound uncertainty on the policy side. One of the good-news stories in exports this past year has been a spike in exports of wood products since the expiry of the last softwood lumber agreement in October 2015. With new trade action on the way, interim tariffs on Canadian lumber are a certainty, as is a slowdown in wood products trade in the months ahead.

Another trade dispute over softwood lumber is just one item on what is sure to be a long list of trade challenges as Canada copes with the impact of the new Trump Administration. An expressed desire to renegotiate NAFTA, introduce an import tax (and corresponding export subsidy), and tighten government procurement rules, are just a few of the initiatives flagged by the US that will create policy and business headaches for Canada this year.

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