June 08, 2021 | 09:13
Trade Cools its Jets, but Making Surplus a Habit
Canada's trade balance swung back in surplus territory in April but how it got there was not ideal, with imports falling much faster than exports. The $594 million of black ink was better than expected and followed a brief dip into a $1.35 billion deficit in March (first pegged at -$1.1 billion). After spending most of the past six years in deficit, Canada's merchandise trade balance has posted surpluses in three of the first four months of this year. Strong U.S. demand for goods and a spirited comeback in commodity prices have helped turn the tide. But the swing back into the black in April was mostly owing to a 4.7% drop in imports, with the weakness led by a 22.1% plunge in autos and parts. The chip shortage carved heavily into production in the month, but also clipped sales. Exports were down 1.0%, also dinged by an 18.1% drop in autos and parts. Early indications for May suggest that auto production improved a tad from April's lows, but remained soft last month.
In volume-terms, exports dropped 2.9% while imports took a 6.2% hit, the largest since exactly one year ago the depths of the lockdowns. While net exports thus improved in the month, they still start Q2 weaker than all of Q1, pointing to a small drag on GDP in the current quarter. Our call of flat GDP in Q2 assumes roughly no change in net exports, so even with the small improvement in April, there's still downside risk to our Q2 growth call.
Trade in services deteriorated in April, with exports sagging 2.2%, while imports nudged up by a similar tally. This pulled the services balance into a small $226 million deficit in the month. Still, combined with merchandise trade, the overall goods & services balance improved somewhat to a small surplus of $368 million from a deficit of $1.16 billion in March.
Bottom Line: The headline surplus result is small positive surprise, but it comes with the big asterisk of pronounced weakness in two-way auto trade. But even aside from that iceberg, trade volumes were sluggish in the month, and point to further modest softness in Q2 for net exports.