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The Quick Take: May 3, 2018

Merchandise Trade Deficit Widens to a Record High

Doris Chu
Senior Economist
National Forecast

“Although Canada’s merchandise trade deficit widened to record high in March, a strong export and import showing was an encouraging sign that the trade sector is slowly getting back on track. Nevertheless, until NAFTA renegotiations are finalized, the outlook for the trade sector will continue to be mired with uncertainty.”

Following two months of sluggish activity, merchandise exports bounced back with 3.7 per cent growth in March. Increases were widespread, as exports excluding energy products were up 3.6 per cent. Aircraft and other transportation equipment led the way bolstered by higher shipments of boats and other personal transportation equipment to Saudi Arabia.

Despite the increase in exports, Canada's merchandise trade deficit widened to a record $4.1 billion in March as imports soared 6.0 per cent to a record $51.7 billion. Import gains were widespread, with motor vehicles and parts, and consumer goods making the largest contributions to growth. Despite taking a huge bite out of the trade balance, the sizeable jump in imports suggests domestic demand is holding up.

Exports to the U.S. increased by 1.2 per cent, fueled by higher shipments of crude oil. However, a larger 3.1 per cent increase in imports reduced Canada’s trade surplus with the U.S. from $2.3 billion February to $1.7 billion in March. This was the fifth consecutive month that Canada’s trade surplus with the U.S. has shrunk.

Similarly, Canada’s trade deficit with the rest of the world increased from $5.2 billion in February to $5.8 billion, as imports inched ahead of exports by a small margin.

In real terms, exports increased by 3.0 per cent while imports increased 5.3 per cent, indicating the trade sector continues to be a drag on overall economic growth.

With the trade sector not expected to make a positive contribution to Canada's expansion anytime soon, the Bank of Canada will likely remain cautious in the timing of its next rate increase. Nonetheless, with capacity constraints increasingly becoming an issue, we continue to expect one more rate increase in 2018.

Despite today’s encouraging report, a cloud of uncertainty continues to hang over the trade sector as prospects for many industries hinges on the outcome of the North American Free Trade Agreement (NAFTA) renegotiations. The U.S. is pushing to finalize a deal this month. If this fails, ratification of a new deal would likely be delayed until after congressional elections in November.

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