U.S. Slowdown Spills Over as Canada Trade Gap Hits Record

  • Canada's exports to its biggest partner fall 6.3% in March
  • Report dents outlook for economy's recovery from oil shock

Canada’s economic recovery just hit a big U.S. pothole.

The nation’s exports to the U.S. plunged at a pace not seen since the last recession, Statistics Canada reported Wednesday, producing a record trade deficit of C$3.41 billion ($2.65 billion) in March.

The report mirrored data released separately by the Commerce Department for U.S. trade and has rekindled concern a stalling American recovery poses a major global risk. Weaker demand threatens to derail rebounds underway in many of the U.S.’s main trading partners including Canada.

“Canada is still not out of its economic misfortune,” Nick Exarhos, an economist at CIBC World Markets in Toronto, said in a telephone interview. “The economy has lost much of its momentum.”

Erik Hertzberg/Bloomberg
Erik Hertzberg/Bloomberg

Canadian exports fell 4.8 percent to C$41 billion in March, the lowest in two years, extending the 6.6 percent drop the prior month. The two-month decline is the biggest since 2009.

Exports to the U.S. fell 6.3 percent and are down 13 percent in two months. The trade surplus with the U.S., which consumes about three-quarters of Canada’s exports, shrank to the narrowest since December 1993.

Sluggish Growth

A sluggish economy south of the border is to blame. The world’s largest economy is emerging from its slowest quarter in two years, with U.S. output expanding at a 0.5 percent annualized pace in the first quarter. As American companies worked to get inventories in line with weaker demand and U.S. consumers cut back, the consequences are being felt globally.

The Commerce Department reported U.S. imports in percentage terms fell by the most in seven years, adding to a growing litany of global headwinds for countries like Canada that include volatile markets and slowing growth in China.

Bank of Canada policy makers have pointed in recent speeches to the risks from weaker global growth, which make companies more reluctant to expand hiring or investment. They have also warned the surge in first quarter output -- expected to bring growth in Canada to about 3 percent -- will fade, a forecast the data seem to be validating.

‘Mediocre Prospects’

For Canada though, the biggest worry is the U.S. economy.

“You factor in uncertainty over the U.S. economic outlook outlook, U.S. capital expenditures that are still uncertain and Canadian dollar strength, you’re left with the idea that Canadian exports will remain mediocre,” said David Watt, chief economist at HSBC Holdings Plc’s Canadian unit in Toronto.

Central bank Governor Stephen Poloz said last month he probably would have considered cutting interest rates had the federal government not ramped up fiscal stimulus. Traders increased bets on rate cuts later this year.

The Canadian dollar weakened by 1.2 percent to C$1.2876 per U.S. dollar at 1:32 p.m. Toronto time. The currency is still 6.8 percent stronger over the last three months, a gain the Bank of Canada identified last month as another risk to export growth.

Trading in overnight index swaps indicates a 17 percent chance of a rate cut this year, up from 4 percent Tuesday. Yields on Canadian government two-year debt fell to 0.59 percent, widening the spread to 16 basis points below equivalent-maturity U.S. yields, from 11 points Tuesday.

“This is a simply horrible report ,” Derek Holt, Scotiabank’s vice-president of economics in Toronto, wrote in a research note.

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