Canada's Trade Deficit Widens in August on Export Weakness -- Update

By Paul Vieira Features Dow Jones Newswires

Canada's trade deficit widened in August from the previous month to the fifth-largest on record, as exports fell for a third-consecutive month and are now down on a year-over-year basis.

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The deteriorating trade picture in Canada likely strengthens expectations that the Bank of Canada takes a pause this month -- and possibly for the rest of 2017 -- on rate rises after increases in July and September.

Canada's merchandise trade deficit in August stood at a seasonally adjusted 3.41 billion Canadian dollars (US$2.73 billion), Statistics Canada said Thursday, compared with a revised C$2.98 billion shortfall in the previous month.

The August trade deficit was wider than what traders anticipated. According to economists at Royal Bank of Canada, market expectations heading into Thursday's Canada trade report was for a C$2.6 billion shortfall.

Canada's monthly trade data covers the export and import of goods, and doesn't include services.

The disappointing trade report is the latest indicator signaling the Canadian economy has stalled after a stellar 12-month run that was tops among Group of Seven economies. Economic output in July was unchanged from the previous month, bringing an end to eight straight months of gains.

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"The continued weakness in export volumes and softness in imports indicate that the pace of economic growth slowed sharply in the third quarter," said David Madani, an economist at Capital Economics, which now forecasts annualized growth of 2% in the third quarter after a 4.5% jump in the previous three-month period.

The August trade report also signals recent strength in the Canadian dollar -- especially since June when the Bank of Canada first signaled rate increases were in the offing -- has dampened export activity. Since raising rates in July and September, central-bank officials said they would gauge the economy's response to a stronger currency and other data when crafting rate policy. These remarks have markedly lowered market expectations for another rate increase later this month.

In August, exports fell 1% to C$43.63 billion. Exports have dropped for the three-straight months and are now off 10.6% from May's record level. Excluding energy products, sales of goods abroad fell 1.4%. On a 12-month basis, Canadian exports fell 0.2%, or the first time there has been a year-over-year drop in nearly 12 months.

In volume, or price-adjusted, terms, exports fell by a steeper 1.9% in August.

This was "another ugly month for Canadian exports in August," said Nick Exarhos, an economist at CIBC World Markets. The poor export performance is "a reason why we are forecasting a more muted growth picture in the second half of the year that should keep [the Bank of Canada] using a more gentle hand on interest rate hikes going forward," Mr. Exarhos said.

Imports totaled C$47.04 billion in August, or unchanged from the previous month, the data agency added. Import volumes rose 0.2% while prices fell by a similar 0.2% in the month. Imports rose 3% in August from a year before.

Meanwhile, the U.S. also released its August trade figures on Thursday, and the trade deficit narrowed to $42.40 billion on a pickup in exports.

Canada's trade report indicated exports to the U.S. fell 1.8% in August, to C$32.61 billion. As a result, the trade surplus in goods Canada runs with the U.S. narrowed to C$2.31 billion. When services are incorporated, figures suggests the U.S. runs a slight trade surplus with Canada. Canada is America's second-largest trading partner, and the two countries are engaged in talks, along with Mexico, about revamping terms in the North American Free-Trade Agreement.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

October 05, 2017 10:42 ET (14:42 GMT)