07/03/2013 08:56 EDT | Updated 09/02/2013 05:12 EDT

Trade deficit narrows, but exports continue as weak link to economy

OTTAWA - Canada's ability to sell its wares to the rest of the world remains a key weak link in the economic recovery as fresh trade data released Wednesday showed exports shrinking in both value and volume in May.

The overall trade deficit for the month actually narrowed to $303 million from a worse-than-previously reported $951 million in April, but that was almost entirely due to a 3.2 per cent decline in imports.

Exports fell by 1.6 per cent over the month and slipped 0.7 per cent in real terms, which directly impacts the country's gross domestic product.

Analysts have been waiting for an economic revival in the United States to start increasing demand for Canadian goods, but that has yet to fully materialize. In May, shipments to the U.S. actually declined 1.6 per cent.

"While the headline looks good, the details are underwhelming," said senior economist Benjamin Reitzes of BMO Capital Markets.

"With June economic data expected to be very weak due to the Alberta flood and Quebec construction strike, the Canadian economy could use a solid May. Unfortunately, the trade figures aren’t pointing in that direction."

With domestic factors such as housing showing signs of fatigue, the Bank of Canada has built in a resurgence in exports — particularly to the United States — as a lynchpin for growth going forward. Notably, its own projections show the boost starting in the second half of 2013.

That is also the view of TD Bank economist Francis Fong. He notes that Canada's second quarter was always projected to be soft due to the flow-through of the sequester budget cutbacks in the U.S., which took effect in April.

"All signs are pointing to a stronger recovery in the U.S. by the second half of this year. When you look at things like housing, manufacturing, spending numbers — they are all pointing to a stronger second half, so that's something to focus on," he said.

"Lets wait for it."

The Canadian dollar was marginally higher upon release of the report showing an improved trade balance.

Meanwhile, the net trade figure could contribute positively to GDP in the second quarter, although that is mostly due to the decline in imports. The exports contribution is also expected to benefit from the stronger first quarter.

By the numbers, exports declined 1.6 per cent to $39.3 billion in May as prices decreased one per cent and volumes slipped 0.7 per cent.

Imports were down 3.2 per cent to $39.6 billion after four consecutive monthly increases.

The overall decline in exports was led by metal and non-metallic mineral products, as well as motor vehicles and parts.

Imports from the United States declined two per cent to $25.7 billion and exports fell 1.6 per cent to $29.2 billion. That raised the trade surplus with the United States to $3.5 billion in May from $3.4 billion in April.

Imports from countries other than the United States fell 5.3 per cent to $13.9 billion and exports to those countries slipped 1.6 per cent to $10.1 billion, cutting the trade deficit in this sector to $3.8 billion in May from $4.4 billion in April.