BUSINESS

Global weakness hitting Canadian exporters as trade deficit widens

07/11/2012 08:48 EDT | Updated 09/10/2012 05:12 EDT
OTTAWA - Canada's merchandise trade deficit with the world expanded more than expected to $793 million in May, suggesting global economic difficulties are taking a toll on Canadian producers.

It was the second consecutive big monthly setback after some steadily improving trade results, and was made worse by a revision to April's data, which pushed that month's deficit to $623 million from a previously reported $367 million.

The surprisingly strong downturn worried even normally bullish analysts that a trend to weaker numbers may be setting in.

Economists said the trade performance will drag down economic growth in the second quarter, which ended in June but has yet to be released.

"There's not much that's bright about these numbers. It's generalized weakness any way you cut it," said Peter Hall, chief economist with the Crown agency Export Development Canada.

As expected, given the European recession and slow growth in the United States, exports to most advanced countries were weak during the month. But, the big shocker was that exports to Japan fell a massive 25.7 per cent.

"That is mystifying," Hall said. "I'm still trying to figure out what is going on there. Is that the end of reconstruction (from the tsunami and earthquake) as far as Canada is concerned, or is that the volatility of a period of extraordinary stimulus?"

Overall, exports held steady at $38.9 billion, while imports rose 0.4 per cent to $39.7 billion.

But Bank of Montreal economist Robert Kavcic notes that in real terms —a measure with direct bearing on economic output, exports fell in May by 0.6 per cent, with negative implications for second-quarter growth.

"We don't like to see trade being a subtraction for growth at this point, especially with consumer spending and housing slowing," he said.

Another surprise, said Emanuella Enenajor of CIBC, is that imports of machinery and equipment again declined and are down on a year-to-year basis, flying in the face of Bank of Canada surveys suggesting firms will continue to up investments.

The Bank of Canada had expected second-quarter economic growth to come in at 2.5 per cent, but most economists believe the central bank will cut that projection next week.

The exports performance was generally negative in May, with the exception of an impressive 8.7 per cent increase in shipments of machinery and equipment, including a 46 per cent jump in exports of aircraft, engines and parts.

But exports in energy products fell 4.3 per cent, and there were also declines in forest products, agriculture and fishing, industrial goods and automotive products.

By destination, Canada's trade surplus with the United States slipped to $3.2 billion in May from $3.6 billion the previous month, with a 1.8 per cent rise in imports more than offsetting a small 0.2 per cent gain in exports.

Meanwhile, the trade deficit with other countries narrowed to $4 billion from $4.2 billion in April, as imports declined 1.9 per cent while exports were down 0.7 per cent.

Note to readers: This is a corrected story. A previous version incorrectly reported an April data revision as $327 million