Narrowing Trade Gap Backs Poloz’s 2nd-Half Recovery Story

  • Exports rise 3.4% in year’s biggest gain, led by vehicles
  • Report breaks string of record gaps ahead of rate decision

Canada’s July trade deficit narrowed more than forecast on the biggest jump in exports this year, reinforcing the view the Bank of Canada won’t lower interest rates.

The deficit shrank to C$2.49 billion ($1.9 billion), Statistics Canada said Friday from Ottawa, versus the C$3.3 billion median of 17 forecasts in a Bloomberg economist survey. The statistics agency also boosted the estimated June deficit to a fresh record of C$3.97 billion, from an earlier C$3.63 billion.

The report signals a break from record shortfalls over the past several months. Bank of Canada Governor Stephen Poloz and his deputies expect non-energy exports will lead a rebound in the second half of this year, after May’s Alberta wildfires and an earlier oil-price crash took their toll on the economy. 

July’s trade figures are the last big scorecard ahead of the central bank’s Sept. 7 decision on the 0.5 percent policy interest rate. Friday’s report marks “the first positive step,” according to Nathan Janzen, an economist at Royal Bank of Canada. “It does let them maintain that tone that the drop in the second quarter was overstated and we will get stronger export growth going forward,” he said by phone from Toronto.

Canada’s dollar strengthened 0.6 percent to C$1.3022 per U.S. dollar at 10:48 a.m. Toronto time. Government bond yields rose, with debt due in five years up 5 basis points to 0.69 percent.

Erik Hertzberg/Bloomberg

Exports rose 3.4 percent to C$42.7 billion in July, with gains in nine of 11 major categories, Statistics Canada said. Imports fell 0.1 percent to C$45.2 billion, the second decline in three months.

Motor vehicle shipments rose 6.2 percent, the first gain in six months, and shipments of both metals and aircraft both rose by almost 10 percent in July.

The improvement was even better in so-called volume terms that strip out price changes and can be a better signal of economic growth. On that basis exports advanced 3.7 percent and import volumes fell 1.2 percent, the statistics agency said.

Canada still has a long way to go to return to full health on the trade front. Exports have fallen 7 percent over the last 12 months, much faster than the 2.6 percent decline for imports.

The trade balance has been in deficit since September 2014, and the cumulative deficits so far this year of C$20 billion are on track for a second straight record.

“We’ll need to see some follow through over the next couple of months, but this should ease some concern about the health of the export sector,” said Benjamin Reitzes, a senior economist at BMO Capital Markets in Toronto.

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