Canadian Analysis

The Bottom Line

There were further signs of stabilization in Canadian international trade flows in October, with the goods trade balance little changed in the month, edging down to a small (-0.6 billion) deficit from the small 0.2 billion surplus in September. 

Pockets of Canadian international trade continue to be significantly impacted by tariffs. The trade deficit would have been ~$139 million wider in October without a surge in medium and heavy vehicle truck exports ahead of new U.S. tariffs in November. And steel product exports were down 44% from a year ago.

But broader trade flows continue to show signs of stabilization. Controlling for changes in prices, net trade to-date is tracking another sizable positive contribution to Q4 GDP growth to build on the 3.1 percentage point (annualized) add in Q3 and further retrace the record 8.9 percentage point subtraction in Q2 after the initial wave of U.S. tariffs imposed last year.

And higher imports are a positive indicator for domestic demand – jumps in imports of electronics and industrial equipment in October are a positive indicator of near-term consumer and business spending.

Uncertainty about Canada’s future trade relationship with the U.S. remains, slower population growth will weigh on aggregate output, and weak productivity growth persists as a structural challenge. But most exports (87%) continued to cross the border duty free to the U.S. in October. Absent another external shock, we remain cautiously optimistic about the Canadian economic outlook in the year ahead and don’t expect the Bank of Canada will need to lower interest rates further. 

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The October details

• The merchandise trade balance was little changed in October — swinging back to a small -0.6 billion deficit from a 0.2 billion surplus in September, but still well above the 6.7 billion shortfall in August.

• The small decline in the trade balance largely reflected an increase in imports that offset a surge in commodity exports to non-U.S. destinations (gold to the U.K., and oil to China).

• Exports rose 2.1% despite a 3.4% drop in shipments to the United States — exports to non-U.S. destinations jumped 15.6%, led by higher exports of gold to the U.K. and an increase in oil exports to China. 

• Motor vehicle exports jumped 4.1%, with exports of heavy trucks up 24.7% ahead of new U.S. tariffs imposed on those products in November. 

• The 3.4% increase in November imports was relatively broadly-based.  Imports of industrial chemicals and rubber products fell 7.5% but purchases of industry machinery and equipment (+5.7%) and electronics and electrical equipment (+10.2%) posted large gains — the latter reflecting higher imports of computers and cell phones. 

• Controlling for price changes, goods export volumes (chained basis) were an annualized 16.5% above their Q3 average in October following a 3% increase in Q3 and 31% plunge in Q2. That increase leaves net trade tracking another sizable add to GDP growth in Q4 to build on the 3.1 percentage point increase in Q3. 

• From U.S. trade data also released this morning, most (87%) of Canadian goods exports to the U.S. continued to cross the border duty free in October, and the average effective U.S. tariff rates on imports across all products remained the lowest of major U.S. trade partners at 3.9% (unchanged from September, and well below the 11% rate on U.S. imports from all countries.

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About the Author

Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.

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