Senior Director of Canadian Economics
Canada: A Big Trade Deficit in May Won’t Deter the Bank from Hiking
- Canada’s international merchandise trade balance went from a $894 million surplus in April to a $3.4 billion deficit in May. This is the largest trade deficit in goods since October 2020, and came in well below the consensus of private sector forecasters.
- The primary driver of the return to a trade deficit in May was a 3.8% decline in total exports to $61.5 billion. Exports of energy products (-7.3%) led the drop, with falling prices contributing to broad based declines in the category. But it wasn’t just a price story. Falling foreign demand, notably for coal in Asia, also contributed to the weakness in energy exports. Similarly, improved global supply conditions and falling prices for farm, fishing and intermediate food products pulled down exports in this commodity-heavy category as well (-13.4%). In volume terms, exports fell a more modest 2.6% in the month.
- Meanwhile, total imports increased 3.0% in May to $65.0 billion. Imports of metal and non-metallic mineral products (12.3%) led the charge higher, due in large part to greater imports of unwrought gold, silver, and platinum. This category has been moving high since February, and tends to rise during periods of economic uncertainty. At the same time, imports of motor vehicles and parts also posted a healthy advance (4.5%), an ongoing trend reflecting both sustained demand for passenger vehicles and improving supply chain conditions. Turning to volumes, real imports rose by 3.7% in May.
- Canada’s trade surplus with the US narrowed to $6.7 billion in May from $8.7 billion a month earlier. This is the lowest in two years, and was largely driven by falling exports of crude oil.
- Looking to services, Canada’s trade deficit narrowed slightly in May—from $1.2 billion to $1.1 billion—as imports retreated by 0.5% in the month while exports were broadly flat. The deficit in services remains narrower than it was pre-COVID.
Today’s trade release was a double-edged sword in what it means for the Canadian economy. The decline in export volumes suggest goods-producing sectors like agriculture and resource extraction may post weaker numbers in Q2 than previously anticipated. But at the same time, the increase in import volumes point to strong consumer demand in the quarter. As a result, today’s sharp swing in the trade deficit didn’t move the real GDP growth tracking from nearly 2% annualized in Q2 but instead tilted the driver away from trade and back toward domestic demand. If anything, this just reinforces our view that the Bank of Canada is probably going to hike by 25 basis points at next week’s meeting, and will keep the door open to addition hikes if the data doesn’t cooperate.
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