We used to take surpluses for granted. But one key feature of post-crisis Canada was the emergence of a persistent trade deficit. In general, the word 'deficit' scares us, and in most cases, it should. But in this case, the red ink speaks of the resilience of Canadian domestic demand in the face of global collapse. More recently, the tables are turning, and the ink is getting blacker. Is this just a temporary shift, or is something bigger going on?
From a balanced position at the beginning of the 1980's, Canada enjoyed a trade surplus for most of the decade. The 1990-91 recession threw us into deficit, albeit a mild one, where we stayed for a half-decade through the jobless recovery. What followed was a three-year spurt in the surplus, a two-year pause and then a full-blown rally that came to a crashing halt in 2009. This roller-coaster ride has taken the surplus as high as 7 per cent of GDP and the deficit as large as 3 per cent of GDP in the past 15 years.
We are still officially in deficit at the moment, but early signs are pointing to a reversal that could be quite dramatic. A sharp increase in merchandise exports this year lifted the nominal trade balance for goods into a surplus that is getting steadily wider. As of July, the monthly surplus was $2.6 billion and growing. Canada recorded back-to-back surpluses of $1.8 billion in the first and second quarters of this year, the first time a quarterly surplus was recorded since 2011, putting us on track to record an annual surplus for the first time since 2011. Even after adjusting for inflation, the merchandise trade numbers are moving convincingly into surplus. So, what is driving this remarkable about-face?
Solid export growth is the main reason. Since last December, Canada has put together a string of very impressive monthly growth stats, with very few interruptions. What catches the eye even more about the growth is that it is distributed across a broad range of industries, and is spread across almost all provinces. External demand is coming primarily from the United States, but year-on-year growth to Western Europe has also been remarkable. Growth has been so steady that it looks like we have finally turned the corner, putting the worst of the post-crisis period behind us.
Clearly, exports are only half of the trade surplus story. Exports may soar, but if imports are doing the same, then the balance can be static or even deteriorating. In this case, imports are growing at a tepid pace. That speaks to the weakness of Canada's internal economy, which is beset by highly-indebted consumers and an overbuilt housing market, to say nothing of the public sector, which remains in austerity mode. Even so, the weakness to date is something of a puzzle, because exporters are also importers: increasingly, the import content of Canadian exports is rising, so as time progresses, the growth rates of imports and exports are more intertwined. In this case, domestic market weakness is making its mark on the numbers; the growth wedge has been unusually persistent over the past few months.
As far as we can see, it looks like Canada is set to move back into a sustained trade surplus in the near term. The weaknesses in the domestic economy are not likely to go away for a few years, and will continue to weigh on imports. At the same time, the re-emergence of the US economy is expected to fire up demand in other OECD markets and in emerging markets alike over the coming months, rekindling the diversification of Canadian trade to less-traditional, high-growth economies.
Moves like this don't escape the notice of financial markets, though. Exports will increasingly benefit from the nascent weakening of the Canadian dollar, but the emergence of surpluses may attract portfolio inflows that stem the slide of the loonie. On balance, we don't expect a reversal in our dollar, but there is a risk that as in the past, markets will overreact.
The bottom line? For the moment, we can begin to bask in the positive reversal of our trade balance. It says good things about where the global economy is headed, that Canada is on the leading edge of this growth, and that the economy in general will do alright in the face of our internal softening. Canada is again lucking out with offsetting economic movements.
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