Canadian Exports Bounced Back in July
- The trade deficit in July narrowed to -$2.5 billion from a record $4.0 billion shortfall (revised from -$3.6 billion) in June.
- Exports jumped 3.4% and imports dipped 0.1% in July.
The export gain was led by broadly-based strength outside of the energy sector with 9 of 11 sections reporting increases. Even in the energy sector, a 0.8% dip in the month was due to lower prices with volume shipments up 3.2%. Overall, volume exports were up 3.4% with non-energy shipments rising at a similar pace. The dip in imports in July, although positive in an accounting sense for the net trade balance, was somewhat more disappointing, particularly a pull-back in industrial equipment imports that, if sustained, would bode poorly for business investment in the quarter.
The rise in export volumes left the measure already up 7.3% in July relative to its Q2 average, consistent with our forecast for a bounce-back following an outsized export drop of 18.5% in Q2. With import volumes down in the month, net trade appears likely to make a strong contribution to Q3 GDP growth, potentially retracing half or more of the Q2 weakness when net trade subtracted almost 6 percentage points from growth.
The bulk of a large 1.6% (annualized rate) drop in Q2 GDP reflected a sharp pull-back in oil production tied to transitory maintenance shutdowns and disruptions tied to wildfires in Alberta in May. Nonetheless, net trade was also clearly a sore spot, in part reflecting a drop in oil exports but also a large pull-back in the non-energy sector. A rebound in oil production will provide a significant boost to GDP growth in Q3; however, our forecast (and that of the Bank of Canada) assumes that for growth to be sustained at an above-potential pace beyond the current quarter, non-energy exports, and resulting greater strength in non-energy business investment, will need to emerge. The rebound in export volumes in July did not fully retrace earlier weakness with non-energy exports still below year-ago levels in the month. The gain is nonetheless encouraging and provides reason for optimism that the expected re-bound from what looked like overstated Q2 weakness is occurring.