Canada: Imports continue to outperform, suggesting domestic demand remains strong - RBC

Nathan Janzen, Senior Economist, at RBC Economics explained that today’s trade data from Canada showed a decline in exports affected by a slide in non-energy products and that imports outperform suggesting that domestic demand remains strong. 

Key Quotes: 

“Canada’s trade deficit unexpectedly widened to $3.4 billion in August. Exports fell 1.0% in nominal terms and 1.5% controlling for price changes. The August pullback marks a third consecutive monthly export volume drop with non-energy exports once again leading the way lower.”

“We continue to expect that a pickup in trade growth globally in recent quarters and signs of life in the U.S. industrial sector will ultimately support a return to a gradual uptrend in Canadian exports going forward, although attention will also be paid to any signs that the (broadly-based) appreciation in the Canadian dollar since early June is eating into Canada’s share of foreign demand.”

“The import data continues to look more encouraging. Import volumes inched up 0.3% in August and were still up 3.1% from a year ago. Imports of industrial equipment, a key indicator of domestic business investment spending inched lower in volume terms in August but were still up 13% from a year ago and a whopping 18% (annualized rate) Q3 to-date relative to Q2. The relative strength in imports is a negative for the trade balance but argues that domestic demand remains strong.”

“On balance, today’s data adds to the evidence that the outsized outperformance of the economy over the last year is coming to an end. It also, however, does not alter our expectation that growth will still remain at an ‘above-potential’ pace and — with the economy probably already quite close to capacity limits — that further gradual Bank of Canada interest rate hikes will be warranted.”