- The September 2013 merchandise trade deficit shrank more than expected to $0.4 billion from a $1.1 billion shortfall in August.
- The improvement occurred as exports jumped $0.71 billion (1.8%) with imports providing only a modest offset by rising only $0.06 billion (0.2%).
The September merchandise trade report showed a better than expected improvement to $0.4 billion from the August shortfall of $1.1 billion (previously estimated as $1.3 billion). Market expectations had been for a modest improvement to $1.0 billion. The improvement largely occurred as exports jumped $0.71 billion (1.8%) with imports providing only a modest offset by rising only $0.06 billion (0.2%).
The increase in exports was largely concentrated in two components with energy exports rising $0.4 billion (4.6%) and aircraft exports up $0.2 billion (17.4%). Most other components were relatively steady in the month. In contrast, although overall imports were relatively steady in the month, there were some significant, but largely offsetting, movements among a number of the components. Upward pressure in imports was led by gains in the energy ($0.3 billion or 7.3%) and consumer goods ($0.2 billion or 2.2%). The offset was led by declines in industrial chemical, plastic and rubber products ($0.3 billion or 7.1%), and aircraft ($0.2 billion or 12.7%) imports.
On a volumes basis (using 2007 chained dollars), exports jumped an even greater 1.9% with imports falling 0.5%; thus, both components contributed to the deficit being halved to $0.8 billion in September from August’s $1.7 billion.
Despite the improvement in the trade balance in September relative to August, the average deficit during the third quarter of 2013 of $0.92 billion is up relative to the $0.85 billion recorded in the second quarter. This deterioration is consistent with our expectation that net exports on a volumes basis will subtract about one percentage point from annualized third-quarter 2013 GDP growth. Some of the deterioration in trade reflects strengthening imports that we expect will be reflected in increasing investment activity. Thus, today’s report does not alter our view that GDP growth in the quarter is expected to strengthen to 2.8% from the 1.7% recorded in the second quarter. This would imply a stronger pace than the 1.8% projected by the Bank of Canada in its October forecast; however, to alter policy, the central bank would need to see evidence of this strength being sustained going forward. The rise of ‘external headwinds’ in the form of ongoing fiscal wrangling in Washington provides a clear challenge to sustaining such and thus incentive for the Bank of Canada to keep policy highly accommodative. Our forecast assumes the overnight rate holding steady at 1.00% during 2014.
RBC