10/13/2011 08:48 EDT | Updated 12/13/2011 05:12 EST

Canada's Trade Deficit Widens In August As Imports Outpace Exports: StatsCan


OTTAWA - Canada's merchandise trade deficit widened in August as import growth outpaced exports in response to softening U.S. demand and a strong loonie, but analysts saw a positive side to Thursday's report from Statistics Canada.

The raw numbers were mildly negative and in line with expectations following a big exports surge in July. Merchandise imports grew 0.7 per cent, while exports rose 0.5, taking Canada's trade deficit to $622 million in August from a downwardly revised $539 million in July.

In volume terms, when currency fluctuations are factored out, exports declined 1.1 per cent, the agency said.

But the most important development, said economist Peter Hall of Export Development Canada, was the agency's revision of export growth in July to 4.6 per cent, from 4.1. That takes the sting out of much of August's retrenchment, he said.

"Folks might be discouraged by the August numbers, but the fact we did not recoil from the July numbers is very significant. We're up at a new level and by and large we are maintaining that new level. That's great news," he said.

Hall predicted that boost in exports, along with tame imports, could boost gross domestic product output in the third quarter by as much as 2.5 per cent.

"Q3 is looking good," agreed Douglas Porter of BMO Capital Markets. "While the August deficit was a bit wider than the average over the past year ($437 million), it was considerably narrower than the average in Q2 ($1.2 billion)."

With only September data still outstanding on most economic indicators, analysts say there is virtually no chance the Canadian economy contracted during the third quarter. Given the 0.4 per cent step back the Canadian economy took during the spring, another quarter of negative economic growth would have constituted a technical recession.

The big unknown now is what is likely to occur in the fourth quarter, given that China reported Thursday its export growth declined in September. That could signal a weakening global outlook, said analysts.

Although China is often accused of being an unfair trader and swamping advanced economies with undervalued goods, it remains important for Canada and much of the world that China continue to grow rapidly, said Hall.

"I don't think anybody wants a weakening in the Chinese economy. That would be quite destabilizing," he said.

August's numbers confirmed the United States continues to present ever-diminishing returns for Canadian exporters.

Exports to Canada's largest trading partner were down 2.3 per cent to $26.6 billion, while imports rose two per cent to $24.1 billion in August, the highest level since October 2008. Canada's trade surplus with the United States decreased to $2.5 billion in August from $3.7 billion in July.

Aside from poor economic conditions south of the border, the strong Canadian dollar likely played a key role in the dwindling surplus with the U.S.

"Since the end of the recession, the pace of the Canadian dollar appreciation against the greenback has been nearly double that of its appreciation against other currencies," noted economist Emanuella Enenajor of CIBC World Markets.

Meanwhile, exports to other countries rose 7.9 per cent to a record high of $11.2 billion, a fourth straight monthly gain. Imports from countries other than the U.S. fell 1.4 per cent to $14.4 billion.

Canada's trade deficit with countries other than the United States declined to $3.2 billion in August from $4.2 billion in July.

The major source of softness in the report was autos, which fell 7.5 per cent after July's big gain.

Imports of machinery and equipment gained 2.5 per cent to reach $10.5 billion in August, as a result of widespread gains. The increase in the sector was a result of higher prices. Imports of aircraft and other transportation equipment led the increase in value of imports.