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Canada's Big Import Appetite Boosts Trade DeficitMonday, July 19, 2010 > 16:43:19
(Reuters – Louise Egan)
Canada's frothy economic recovery fueled an import surge in May, boosting the country's modest trade deficit and suggesting another interest rate hike may be warranted. Statistics Canada said on Tuesday the trade deficit in May totaled C$503 million ($488 million), up from revised shortfalls of C$330 million in April and C$356 million in March. The median forecast in a Reuters poll had called for the balance of trade to be flat in May, although several analysts had predicted a small deficit.
Import and export growth both beat expectations by a large margin, posting the biggest gains since July 2009, although the country imported more than it sold abroad.
Normally a trade deficit spells bad news for economic growth but analysts said second-quarter gross domestic product figures would be less affected this time given the growth in both import and export volumes as well as evidence of greater business investment and consumer spending.
"The consumer and business sectors in Canada were on fire as evidenced by a voracious appetite for imported capital and consumer goods that also reflects the oft-ignored virtues of Canadian dollar strength," Derek Holt and Gorica Djeric, economists at Scotia Capital said in a note to clients.
The trade numbers did nothing to dispel widespread expectations that the Bank of Canada will raise its key interest rate to 0.75% from 0.5% on July 20, which would be the bank's second rate increase following the recession. "We think these effects on net trade versus other components of GDP growth like consumer spending and business investment trade off against one another to still leave the case for a Bank of Canada hike next Tuesday intact," Holt and Djeric said.
Francis Fong, economist at TD Securities, said Canada's export strength reflects continued recovery in the United States and Europe. "TD Economics expects net exports to detract from growth in the next two quarters, with real export growth of 4%-6% and real import growth in the 7%-8% range," she said. "This will likely change at the end of this year when the U.S. economic recovery finds more solid ground and net exports become a driver of growth by next year."
Second-quarter GDP figures will not be released until the end of August. The central bank's latest forecast is for 3.8% annualized growth in the quarter, but it is expected to tweak that number in its quarterly update on July 22.
Exports jumped 5.2% to C$34.48 billion largely on the strength of automotive products, which accounted for over half the growth. Passenger vehicle sales to the United States leapt to their highest level since December 2006. Shipments abroad also grew for machinery and equipment as well as agricultural and fishing products. Energy exports eked out a 1.6% gain after three months of declines as volumes rose despite a drop in oil prices.
Imports jumped 5.7% to C$34.99 billion on widespread gains, including machinery and equipment and industrial goods – a sign that businesses are expanding – as well as consumer goods.
Canada's trade surplus with the United States widened in May to C$3.59 billion from C$3.46 billion on autos trade. Meanwhile the nation's deficit with countries other than the United States widened to C$4.09 billion from C$3.79 billion.