The export surge that was supposed to be Canada's new growth engine remains elusive.
Canada's merchandise trade deficit widened to almost $1-billion in July on an unexpectedly sharp drop in exports, Statistics Canada reported Wednesday.
And Bank of Canada Governor Stephen Poloz lamented the slow pace of the global recovery as the central bank delayed – once again – a move to raise rock-bottom interest rates to more normal levels.
The bank left its key overnight rate unchanged Wednesday at 1 per cent – the same level it has been at since September, 2010. It marked the 24th consecutive time that the bank has left the rate untouched.
"Uncertain global economic conditions appear to be delaying the anticipated rotation of demand in Canada towards exports and investment," the central bank said in a statement at the conclusion of Mr. Poloz's second rate-setting decision since taking over from Mark Carney in June.
Not only is trade not driving growth, it's detracting from it.
The fundamental challenge facing the Canadian economy is that the factors that lifted the country out of recession are fading, including debt-fuelled consumer spending and government stimulus. And so far, exports and business investment are too weak to pick up the slack, leaving the economy growing at well below what's needed to keep plants near capacity and Canadians employed. Gross domestic product expanded at an annual rate of 1.7 per cent in the second quarter, down from 2.2 per cent in the first quarter.
"If current trends persist, trade may be a drag to the economy for the second quarter in a row," National Bank of Canada senior economist Krishen Rangasamy said in a research note.
Particularly troubling to Mr. Poloz is that Canada isn't yet getting a significant lift from the recovery in the United States – the destination of more than 70 per cent of Canadian exports. In June, the former head of Export Development Canada said Canada's recovery is heavily dependent on what happens to the global economy, and particularly the United States.
July's disappointing trade numbers raise concerns that Canada isn't fully benefiting from the improving U.S. economy, said David Madani, Canada economist at Capital Economics.
"Hopes of an imminent export-led recovery are fading," Mr. Madani said. "Should business investment continue to suffer as a result, then overall economic growth over the second half of this year is likely to fall well short of the sunshine consensus view."
This all suggests that the Bank of Canada is unlikely to start raising its trend-setting overnight interest rate until late 2014 or 2015.
"The bottom line is that we "We are still looking at a very long period of inactivity by the bank, and [we] may well be talking about four years of unchanged rates a year from now," Bank of Montreal chief economist Douglas Porter said in a research note.
Bank of Nova Scotia economist Derek Holt, who doesn't expect a rate hike until 2015, said the bank is signalling a "slightly elevated level of concern" about where the economy is headed.
The Bank of Canada said it won't change its interest rate stance as long as inflation remains muted and there's still slack in the economy.
A major impediment to a pickup in exports is the United States, where the bank acknowledged that there is "slightly less momentum" than expected. The bank statement also pointed to "financial volatility" in emerging markets.
Those factors have been partly offset by Japan's "promising" recovery and "early signs" of recovery in Europe, according to the central bank.
Merchandise imports grew 0.6 per cent in July while exports declined 0.6 per cent, pushing the deficit to $931-million from $460-million in June, according to the latest numbers from Statistics Canada.
Exports slipped to $39.2-billion on a significant drop in aircraft and aircraft components. Export volumes fell 1.7 per cent and prices increased 1.1 per cent.
Imports rose to $40.1-billion, with volumes up 1 per cent and prices down 0.4 per cent. Among the higher-volume imports were metal ores and non-metallic minerals, basic and industrial chemicals, plastic and rubber products, and metal and non-metallic mineral products.