Senior Director of Canadian Economics
Canada: Fade the Data for August Trade
- Canada’s international merchandise trade balance went from a $437 million deficit in July to a $718 million surplus in August. This was well above the consensus call for a $1.2 billion deficit in the month.
- The primary driver of the return to a trade surplus in August was a 5.7% increase in total exports—the strongest pace of growth since October 2021. Commodities were the primary driver of the bumper export print. Higher exports of gold to the US due to asset transfers in the banking sector explain most of the 29.1% month-over-month increase in exports of metal and non-metallic mineral products. As a result, Canada’s trade surplus with the US widened to $10.4 billion from $8.2 billion in July. At the same time, the value of energy exports advanced by 14.6%, with most of the gain (11.2%) chalked up to an increase in the energy export prices on the back of higher crude oil values. Excluding gold and crude oil, the value of exports was essentially unchanged in the month. In volume terms, real exports advanced by 2.6% in August—the strongest print since January of this year.
- Meanwhile, total imports increased 3.8% in August. This offset about two thirds of the sharp drop in imports in July (-5.4%) that resulted, in large part, to disruptions due to the ports strike in British Columbia. While imports posted gains in 9 of 11 sectors, the biggest moves were in chemical products (11.2%), pointing to a rebound in the drop in chemical manufacturing posted in July, and industrial machinery, equipment and parts (7.5%). Imports of consumer products (2.2%) also experienced a tailwind from the end of the BC ports strike. In volume terms, real imports posted a 2.1% gain in the month, providing some offset to bumper export print.
- Looking to services, Canada’s trade deficit widened slightly in August, from $1.2 billion to $1.5 billion. Exports retreated by 0.7% in the month—largely due to the drop in commercial services—while imports advanced 0.7% on the back of greater purchases of travel and transportation services by Canadians.
The goods trade balance for August came as a big surprise but didn’t do much to move the needle on our real GDP tracking for Q3. The sharp increase in exports of gold may be unwound in September, while the increase in energy exports was largely driven by higher prices. On the import side, the end of the BC ports strike provided a tailwind to August imports which, again, probably won’t be repeated. As such, the data doesn’t speak to sustained strength in either foreign or domestic demand.
We continue to expect growth to be broadly flat in Q3. This is well below the annualized 1.5% growth forecast by the Bank of Canada in its most recent forecast. When combined with the weakness in Q2 real GDP and a downward revision to Q1 2023, as well as the run up in bond yields recently, we think there is a high bar for the Bank of Canada to consider hiking interest rates again in October. Indeed, unless the coming September employment and CPI prints surprise well to the upside, we think the Bank will remain on hold at its next meeting and for the foreseeable future.
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