• Data Friday projected to show C$15 million half-year deficit
  • Odds now 4% of Bank of Canada rate cut at Sept. 7 meeting

Data out Friday will probably make it official: Canada’s first-half trade performance was the worst on record. But don’t expect that to force the central bank’s hand.

Economists predict the country posted a trade deficit of C$2.84 billion ($2.18 billion) in June, bringing the cumulative figure to well above C$15 billion this year. That would easily be the highest-ever six-month gap, and puts the country on pace to surpass last year’s record shortfall.

So why isn’t Bank of Canada Governor Stephen Poloz -- who has put an export revival at the center of his growth narrative -- cutting interest rates like he did last year when he was confronted with similarly poor trade data? Probably because the country -- in the midst of one of its weakest expansions ever -- is about to get a large dose of stimulus from Prime Minister Justin Trudeau, which should give central bank policy makers time to remain on the sidelines, at least for a few months.

“They would have cut this time around but they have this thing dangling out there which is fiscal stimulus,” Mark Chandler, head of fixed income research at RBC Capital Markets, said in a telephone interview. “They’ve moved the debate to the third quarter to see if there is any evidence of fiscal stimulus showing up.”

Two big questions now for the Canadian economy are whether the stimulus will work and could a worsening in the trade numbers press Poloz’s hand even before the fiscal measures have kicked in.

Erik Hertzberg/Bloomberg

The federal government has estimated its stimulus measures -- totaling about C$12 billion this year -- will bolster growth by 0.5 percentage points. Almost half of that will come in the form of new enhanced child benefits that were released to households starting last month. Much will depend on whether households save or spend the windfall. Most of the new money put aside for infrastructure and housing also has yet to be spent.

The Bank of Canada is “hoping the fiscal side of the equation comes over the horizon and saves the day,” said David Tulk, head of global macro strategy at Toronto-Dominion Bank. “There’s not a lot of evidence to suggest the bank is getting as much lift from the trade sector as they had initially expected.”

Investors will get some answers to the second question -- whether the country’s trade performance is improving or getting worse -- when Statistics Canada releases trade data along with the latest employment figures at 8:30 a.m. in Ottawa.

Erik Hertzberg/Bloomberg

The big culprit this year has been oil. Exports of crude in the first five months of this year are down 19 percent from the final five months of 2015.

Yet, there is little sign of strength anywhere. Of the 35 industries tracked by Statistics Canada, only four sectors -- making up 3.7 percent of total exports -- had higher sales abroad in May than in December.

That record prompted Poloz to slash his forecasts for exports, with the Bank of Canada now projecting a contribution to growth of 0.3 percentage points, anemic at best. Over the past three decades, the export sector’s contribution has averaged 1.3 percentage points.

Poloz is calling for patience. His focus is on longer-term growth trends that show exports have steadily marched higher since their recession lows, with some occasional glitches like the current one.

Fuller Picture

A fuller picture of the fiscal stimulus probably won’t emerge until after the Bank of Canada’s Oct. 19 rate decision, RBC’s Chandler said in a telephone interview. Policy makers, for example, will by then only have had July retail sales data to gauge the consumer impact.

An improving trade picture in the months ahead may give Poloz more confidence he can wait before making a policy move. If the outlook doesn’t pick up, Trudeau may decide to give the economy another boost by topping up his stimulus measures in a fiscal update later this year, which may also give Poloz more time.

“I don’t see there’s really much need for the Bank of Canada to move rates in any direction,” David Sloan, senior economist in New York at 4Cast Inc., said in a telephone interview. “Fiscal policy is a much more effective tool.”

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