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Canadian export recovery is firmly on track

Canada posted its strongest trade numbers in two and a half years in June, catching markets by surprise and lighting a fire under the Canadian dollar amid new hopes that the country's long-struggling exporters have turned a crucial corner.

Statistics Canada on Wednesday reported a merchandise trade surplus of $1.9-billion in June, the biggest since December, 2011 and far better than the small deficit that economists had expected. Statscan also revised the May trade balance to a $576-million surplus from the originally reported $152-million deficit, and trimmed its April deficit to $423-million from $961-million.

"I think we've got a very strong export trend going," said Peter Hall, chief economist at Export Development Canada, the national export credit agency. "The rotation in growth to exports that we have been anticipating is now in train."

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The surprise June surplus, together with thee revisions, put the trade balance in the second quarter more than $3-billion better than the market had previously believed. The Canadian dollar gained almost half a cent against its U.S. counterpart in the wake of the trade report, hitting a high of 91.60 cents (U.S.) during the day, as the unexpectedly strong numbers suggested that Canada's economy may have grown more in the second quarter than economists previously thought.

"Net exports could add two percentage points to annualized Q2 GDP growth," said Paul Ferley, assistant chief economist at Royal Bank of Canada, in a research note.

Some economists suggested Canada's gross domestic product growth in the second quarter may have topped the Bank of Canada's recent estimate of a 2.5-per-cent annualized pace, more than double the tepid, weather-impaired 1.2 per cent of the first quarter.

After sustaining two years of deficits, the country has now recorded surpluses in four of the past five months, and had a cumulative surplus of nearly $4-billion for the first half of the year.

The key has been a dramatic rise on the export side of the trade ledger – which has long been considered a critical missing element for a healthy, sustained Canadian economic recovery, and as such has been a key focal point of the Bank of Canada. Exports were up 1.1 per cent in June, to a record $45.2-billion, thanks to a 1-per-cent rise in volumes and a small increase in prices. For the second quarter over all, exports surged at an annualized rate of 20 per cent.

What's more, June's numbers suggest a broadening of what until now has been a distinctly uneven export recovery, in which energy exports have soared while non-energy exports have struggled, and some key sectors, most notably autos, have lagged the global postrecession demand recovery. While the energy sector again showed solid 2.5-per-cent export growth in the month (and the energy trade surplus hit a record $8.2-billion), the majority of other sectors also posted gains, including big increases in consumer goods (up 8.3 per cent) and metal and mineral products (up 9.7 per cent). The auto sector slumped 6.4 per cent in the month, but this came after four straight months of strong gains. Since the beginning of the year, exports have risen in 10 out of 11 major sectors.

The import side of the June report, unfortunately, was less rosy. Imports slumped 1.8 per cent, their worst monthly decline since the end of 2012. The decline did contribute to the large surplus in the month, but it also raised worries about the strength of Canada's domestic economy.

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"That could be a signal that domestic demand was weaker than we had previously feared," said Paul Ashworth, chief North American economist for Capital Economics, in a research note.

Still, imports for the second quarter over all rose at a healthy 12.3-per-cent annualized pace, hardly evidence of a slump. And even if June's import data are an early indication that the slowing of Canada's housing market and household debt growth has begun to weigh on domestic demand, the acceleration in exports suggests that the export side is already filling in for any domestic slack – which is consistent with Bank of Canada Governor Stephen Poloz's vision for the next phase of Canada's economic recovery.

One of the most intriguing elements of June's strong trade report was the fact that the export growth came with no help whatsoever from the U.S. market, where exports didn't grow at all in the month – a surprise, given the strong recent economic numbers coming out of Canada's biggest export market. Instead, most of the export gains came from shipments to the European Union, which jumped 12.1 per cent.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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