Canada Trade Deficit in May Widens on Record U.S. Imports -- Update

Canada's trade deficit almost doubled in May from the previous month as imports from the U.S. hit a record high. Meanwhile, export growth slowed in the month, as sales abroad of metals and motor vehicles were offset by a decline in energy products.

Two-way trade in Canada with the rest of the world rose strongly in May from a year ago, underscoring underlying strength in the economy that has prompted the Bank of Canada to signal that interest-rate increases are in the offing.

Canada's merchandise trade deficit in May widened to a seasonally adjusted 1.09 billion Canadian dollars ($836.5 million), Statistics Canada said Thursday, compared with a revised C$552 million shortfall in the previous month. The previous estimate indicated a smaller C$370 million trade deficit in April.

Traders were expecting a May trade deficit of C$500 million, according to a report from Royal Bank of Canada.

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

In May, exports climbed 1.3% to C$48.69 billion. On a one-year basis, exports jumped 17.8%, or the strongest 12-month showing in nearly six years.

Imports rose in May 2.4% to C$49.77 billion, marking one of the strongest month-over-month gains in years.

In volume, or price-adjusted terms, exports rose 1.1% and imports climbed 1.8%.

The total value of trade in Canada, or exports plus imports, climbed 13.8% in May from the same year-ago month.

Meanwhile, U.S. trade figures were also released Thursday, and indicated the U.S. trade deficit in goods and services narrowed as exports rose to their highest level in over two years.

The trade report emerges less than a week before the Bank of Canada issues its next interest-rate decision, and there is heightened market expectations that Gov. Stephen Poloz will raise rates for the first time in nearly seven years. Last week, he said excess slack in the Canadian economy is now being absorbed "steadily" at the current pace of growth, and reiterated that rate cuts delivered in 2015 to offset the negative fallout from lower energy prices have worked.

Further, data indicate the Canadian economy grew at a solid 0.2% in April on a month-over-month basis, setting the stage for a second-quarter annualized gain of roughly 2.5%. And the central bank's survey of firms suggested executives expect sales prospects to improve over the next year, and to maintain or even bolster the pace of hiring to meet demand.

The May trade report, along with the GDP and survey results, will give the Bank of Canada further reason to raise its policy rate on July 12, economists say.

The trade deficit deteriorated "for unexpectedly good reasons," said Derek Holt, economist at Bank of Nova Scotia, who has forecast a rate rise next week. "An almost perfect combination of ripping exports and enough strength in the domestic economy to pull in more imports reflect what the Bank of Canada has emphasized to be more diversified growth."

Traders had priced in this week a roughly 80% probability of a rate rise on July 12, according to the overnight-index swap market.

On the import side, the purchase of goods from the U.S. rose 3.6% in May to a record high C$32.72 billion, led by aircraft and motor vehicles. Canadian exports to the U.S.--by far its biggest trading partner -- fell 0.3% to C$36.25 billion. All told, Canada's merchandise trade surplus with the U.S. narrowed to C$3.53 billion.

Canadian imports from non-U.S. markets rose 0.2% to C$17.05 billion.

The strength in imports "point to healthy internal demand, something that comes with an economy well on the mend, and one that's on track to reach full employment over the coming quarters," said CIBC World Markets economist Nick Exarhos.

Meanwhile, Canadian nonenergy exports climbed 3.6% in May. The Bank of Canada has monitored nonenergy exports for a sign that the economy is starting to firm. Exports of metal and nonmetallic mineral products rose 11.1%, partly due to shipments of unwrought gold to the U.K., and sales abroad from the auto sector climbed 3.6%. Energy exports fell 9% on lower prices.

Write to Paul Vieira at

(END) Dow Jones Newswires

July 06, 2017 10:14 ET (14:14 GMT)