Why Canada’s smaller trade deficit is hardly encouraging

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Canada's trade balance for May brings to mind the famous sketch from Monty Python's The Meaning of Life (well, that and the fact that Python member Michael Palin was in The Globe and Mail's newsroom last week):

Maitre d': Good afternoon, sir, and how are we today?

Customer: Better.

Maitre d': Better?

Customer: Better get a bucket, I'm gonna throw up.

That's the only reasonable interpretation of the "better" trade numbers published Wednesday morning by Statistics Canada.

Yes, the trade deficit narrowed to $303-million in May from $951-million in April. It essentially reversed April's ballooning of the deficit number, more or less returning Canada to its year-long trend of shrinking trade shortfalls.

Before we pop the champagne and commence with the national high-fives, let's consider three ways you can improve your trade numbers:

1. Exports and imports both rise, but exports rise more. This is the best choice; it shows growing foreign demand for your goods, and strong domestic demand, too. It's a clear positive for the economy.

2. Exports rise faster than imports fall. This implies that domestic demand isn't so hot, but at least foreign demand is picking up the slack.

2. Exports fall, but imports fall even more. This is your worst choice. And this, my friends, is what we got in May.

Yes, the trade improvement came despite exports slumping 1.6 per cent – because imports were twice as bad, down 3.2 per cent. Oh, joy. Think our export markets look lousy? Just get a load of demand here at home!

When you have shrinking demand for your exports and shrinking demand for imported goods, you're starting to run out of places to point to for growth, aren't you?

"May's discouraging trade report … is further evidence that the economy lost momentum in the second quarter," wrote David Madani, Canada economist for London-based Capital Economics, in a research note.

When you dig even further into the details of the trade report, you unearth more stomach-turning numbers:

– Exports to the European Union fell 14.4 per cent in the month, and were off 25 per cent from a year earlier.

– Exports of metal and mineral products slumped 15 per cent in the month. Not coincidentally, the makers of those products stopped buying raw materials: Imports of metal ores and minerals plunged 39 per cent.

– Precious-metal exports tumbled 35 per cent – and lower gold prices weren't the problem. Volumes were down 33 per cent.

– Exports of motor vehicles and parts declined almost 4 per cent.

Is there a silver lining here? Well, perhaps a small one. As economist Francis Fong of Toronto-Dominion Bank put it, "While hardly the picture of strength, the data do technically imply that the trade picture has improved." That technicality – together with the rising price of oil, another lucky numerical break that stands to improve Canada's trade balance – was enough to give the Canadian dollar a lift Wednesday.

But the economic implications of the weakness on both sides of Canada's trade ledger overwhelm any small positives that can be taken from the modest improvement in the balance of trade. Mr. Madani now estimates that net exports – which were the biggest positive contributor to Canada's surprisingly strong 2.4-per-cent annualized growth rate in gross domestic product in the first quarter of this year – added a thin 0.5 percentage points to annualized second-quarter GDP growth. He estimates that that economy grew by a tepid 1.5 per cent, annualized, in the second quarter.

Let's put that back in Pythonesque terms. This parrot does not have beautiful plumage. If it hadn't been nailed to the perch it would be pushing up the daisies.