Canada’s trade deficit widens in May on surge in imports

Canada’s trade deficit broadened in May. The trade balance came in a deficit of CAD 1.1 billion in May, widening from April’s deficit of CAD 552 million. This was because imports rose 2.4 percent, outpacing the rise of 1.3 percent in exports. In real terms, imports rose 1.8 percent, while exports grew 1.1 percent.

The rise in imports stemmed greatly from a sharp increase of 46 percent in aircraft and other transportation equipment and parts, as five new airliners were imported. Motor vehicle and parts rose 3.7 percent and energy product imports also grew in the month.

Growth in exports were fairly broad based, led by metal and non-metallic mineral products. Metal ores and non-metallic minerals and energy products provided some offset. Stripping energy products, exports rose 3.6 percent.

Canada’s trade surplus with the U.S. narrowed to CAD 3.5 billion from CAD 4.8 billion, greatly due to higher imports of aircraft and motor vehicles. In the meantime, Canadian trade deficit with the remainder of the world narrowed to CAD 4.6 billion as the 6.2 percent rise in exports outpaced the 0.2 percent growth in imports.

Despite the broadening in the trade deficit in May, Canada’s net trade is still likely to add to economic growth in the quarter. The strong import performance in May is not expected to be repeated given that it triggered from a sharp rise in volatile aircraft imports, noted TD Economics in a research report. In the meantime, export growth was widespread, implying healthy external demand. Given solid momentum elsewhere in the economy, there is some upside risk to the projection of the economy expanding 2.9 percent as a whole in the second quarter, stated TD Economics.

The recent appreciation in Canada’s dollar to a 10-month high of over 77 U.S. cents has subdued Canada’s competitive position slightly. Still sound U.S. demand should continue to underpin exports. With several sectors of the Canadian economy indicating strength, the Bank of Canada is expected to move off the sidelines sooner rather than later.

“While a hike could come as early as next week, we feel that there is little risk in waiting a bit longer to ensure that inflation is moving in the right direction”, added TD Economics.

At 16:00 GMT the FxWirePro's Hourly Strength Index of Canadian Dollar was bullish at 78.2168, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -11.9076. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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