Merchandise trade deficit shrinks in August, mostly due to drop in imports

OTTAWA – Canada’s trade deficit with the world narrowed in August to $1.3 billion from $2.5 billion in July due mostly to a drop in imports, further evidence economists said of the impact of the sluggish global economy on the country.

David Watt, chief economist at HSBC Bank Canada, said the trade gap narrowed for the wrong reason — weakness here in Canada.

“Canada’s trade deficit narrowed in August, and though rising energy prices suggest that the decline was for the right reasons, that is higher prices for key exports, in fact, the narrowing had more to do with slumping imports,” Watt said.

Statistics Canada said Thursday that merchandise imports fell 3.1 per cent to $38.8 billion, with declines in every sector except energy products.

Exports edged down 0.1 per cent in August to $37.5 billion as exports of industrial goods and materials slipped and exports of energy products increased after six consecutive monthly declines.

Watt acknowledged Thursday that a strong jobs report last week will quell debate about rate cuts by the central bank, but the data now suggests the Bank of Canada should remain on the sidelines.

“The evidence on trade and the apparent slowdown in domestic demand should offset the impact of the employment data from last week and again points toward the Bank of Canada removing the last vestiges of its hawkish bias,” he wrote in a report.

The central bank has continued to suggest that interest rates will rise over the medium term, even as many economists have said the sluggish global economy has taken its toll on Canada.

The Bank of Canada’s key interest rate has been set at one per cent for more than two years.

The latest look at the trade picture came as the Macdonald-Laurier Institute released its new composite leading indicator index, which rose 0.1 per cent in August, after four consecutive months of gains of 0.2 per cent.

The institute said the steady growth of the index suggests the Canadian economy will avert a downturn in 2012, despite the turmoil around the world.

Statistics Canada also reported its new housing price index rose 0.2 per cent in August, after a 0.1 per cent increase in July, pushed higher by the markets in Toronto and Oshawa, Ont.

TD Bank economist Francis Fong said the trade report was consistent with a weak third quarter for the Canadian economy.

“Looking ahead, this trend may persist for a few months yet, given a sub-par pace of growth both in the U.S. and globally,” Fong wrote in a note to clients.

Imports from the United States fell 4.3 per to $24.2 billion and exports rose 1.4 per cent to $27.6 billion, raising the trade surplus with the U.S. to $3.5 billion from $2 billion in July.

Exports to countries other than the United States fell 3.9 per cent to $9.8 billion, while imports declined one per cent to $14.6 billion.

The trade deficit with countries other than the U.S. rose to $4.8 billion from $4.5 billion in July.

Exports of industrial goods and materials fell by 6.1 per cent to $8.8 billion, as exports of fertilizers and fertilizer materials fell 22.3 per cent and iron ores, concentrates and scrap dropped 26.8 per cent.

Automotive product exports also fell declined 2.3 per cent to $5.7 billion in August as exports of parts fell six per cent to $1.5 billion on lower volumes.

Exports of energy products rose 5.5 per cent to $8.6 billion after six consecutive monthly decreases. Agricultural and fishing products also added 6.5 per cent to reach $3.6 billion as wheat exports gained 57.5 per cent.

Meanwhile, imports of industrial goods and materials fell 7.4 per cent to $7.9 billion in August, while imports of machinery and equipment dropped 3.8 per cent to $10.4 billion.

Automotive imports fell 3.3 per cent to $6.7 billion, while energy imports climbed 6.1 per cent to $4.1 billion.