October 18, 2011
Canada and the U.S. both recorded trade deficits in August
Chief Economist, CanaData
Both Canada and the United States recorded foreign trade deficits in August, according to Statistics Canada and the Bureau of the Census in conjunction with the Bureau of Economic Analysis (BEA).
The shortfall in Canada’s merchandise trade position was $8 billion in Canadian dollars, seasonally adjusted and annualized. The U.S. goods and services deficit was nearly $550 billion in U.S. dollars, seasonally adjusted and annualized.
That’s still well short of the record US$805 billion deficit recorded in October, 2005.
Canada’s foreign trade position has been problematic ever since the recession, with a small surplus in one month deteriorating into a minor deficit the next.
Prior to the recession, Canada’s net exports could be counted on to make a large contribution (between $40 and $80 billion) to the nation’s overall output level, as captured in the gross domestic product (GDP) calculation.
Of course, prior to the recession the U.S. economy had a much stronger appetite for Canadian motor vehicles, oil and gas, lumber and other products.
Also, while the Canadian dollar has again dropped below parity, due to the flight into the security of the world’s one true reserve currency – the greenback – the loonie has climbed in value by nearly half versus its low-point in 2002 when compared with the American dollar.
Thus, currency valuation has played a role in lowering some Canadian sales to the U.S. while simultaneously boosting export sales to America by some other nations.
China immediately comes to mind. Two-fifths of the U.S. goods and services trade deficit is accounted for by transactions with the People’s Republic.
Relatively low-cost Chinese labour helps, but sales are also facilitated by a value of the yuan that is kept largely under wraps by Beijing. It is not allowed to appreciate to the degree that open market forces would otherwise dictate.
One might expect the overall weakness in the U.S. economy would lower the value of Chinese exports to America’s West Coast.
But in fact, U.S. consumer spending – the source of much of the demand from China - has been holding up quite nicely.
Total retail sales south of the border in September were +8.0% year over year on a three-month moving average (also known as “smoothed”) basis.
A figure of +5.0% is quite good. Increments beyond that are correspondingly better.
Canada’s problems supplying a less-than-fully-functioning U.S. economy are mainly in areas where we can’t compete on cost and in some raw materials markets, either because of industry-specific weakness or because the U.S. has augmented its own sources of supply (e.g., shale natural gas).
Regionally in Canada, let’s look at some of the export trends.
In each province, there are one or two sectors that are most dependent on foreign sales.
Percentage changes in year-to-date figures versus same period last year are shown in brackets.
Moving east to west across the country, Newfoundland and Labrador’s foreign trade sector is being driven by energy products (+29%) and industrial goods (+40%).
The former includes crude from offshore oil wells while the latter is comprised of output from the mining sector (e.g., the start-up of copper and nickel extraction at Voisey’s Bay).
New Brunswick’s exports are being led by energy (+26%), with agricultural and fishing products (+13%) and forestry products (-5%) nearly tied for second. The forestry sector has been hammered by weak U.S. housing starts.
New Brunswick has significant refining operations plus a liquid natural gas plant.
Topping Quebec’s exports are industrial goods (+16%) – e.g., from mining projects including base and precious metals, iron ore and aluminum - and machinery and equipment (+2%), which is mainly the province’s aerospace sector.
Ontario’s export scene is being driven about equally by industrial goods (+26%) – the price of gold set a new record high this year, before pulling back of late - and automotive products (-3%).
In September’s U.S. retail sales figures, sales in the motor vehicle sub-sector fell back from a blistering +17% year-over-year pace in February to +7.5% smoothed most recently, about the same rate of increase as for total retail.
In Manitoba, it’s agriculture (+6%) and industrial goods (+34%) that are out front, with machinery and equipment (e.g., buses and plane parts) in third place (+13%).
Saskatchewan’s exports sales so far this year have been mostly derived from energy products (+15%), industrial goods (+36%) and agricultural products (+12%). This is one of the few instances where all of a region’s major export sub-sectors are making gains.
Head and shoulders above all other categories, energy products (+17%) in Alberta have been giving a push to export sales. Higher oil prices earlier this year provided a big boost for the industry.
In British Columbia, energy products (+23%) are coming first, followed by the forestry sector (+11%).
Energy products include coal. Improved lumber sales to Asia are helping offset dismal demand from U.S. home-builders.
Canada’s foreign-trade sales success will increasingly depend on pitching raw materials to emerging nations.
Understanding this dynamic is important for the construction industry, because so much of future job-site activity levels will depend on investments in mega resource projects.
For more articles by Alex Carrick on the Canadian and U.S. economies, please see his market insights. Mr. Carrick also has an economics blog. His lifestyle blog is at www.alexcarrick.com
Analysis of Canada's foreign trade position usually focuses on the Merchandise Trade Balance which is goods exports minus goods imports.
Analysis of the U.S. foreign trade position usually focuses on goods and services exports minus goods and services imports.
