Surplus dips but still strong
Imports growing three times faster than exports
Heavy machinery and equipment driving increase
May 13, 2006. 01:00 AM
STEVEN THEOBALD
BUSINESS REPORTER
Canada's merchandise trade surplus dipped $700 million in March, albeit to a still respectable $5.1 billion, as imports grew at triple the pace of exports.
To put things in perspective, financial markets were celebrating after the U.S. trade deficit for March came in a little lower than expected, at $62 billion (U.S.), down $3.6 billion from February, though the shortfall with China rose 13 per cent, to $15.6 billion.
Optimists in Canada can also point to the fact that a key driver for imports continues to be strong machinery and equipment purchases — made cheaper by the strong dollar — as firms invest to boost productivity.
Total exports in March increased 1.1 per cent from the prior month, to $38.25 billion, led by an 8.1 per cent increase in machinery and equipment, which included a big month for aircraft sector shipments, Statistics Canada reported yesterday.
Although the loonie averaged about 87 cents (U.S.) in the month, up 5 per cent from March 2005, exports rose 6 per cent year-over-year.
"Canadian exporters have had a varying degree of success in absorbing the higher Canadian dollar, but more recent gains are likely to put the squeeze on profit margins outside of energy and metals," said Geoff Stone, an economist with Export Development Canada.
On the other side of the ledger, imports climbed to $33.11 billion, up 3.6 per cent on the month and 5.2 per cent from a year earlier.
Gains were spread across most categories, but the big story remains the influx of machinery and equipment, up 5.9 per cent for the first three months of 2006.
Moreover, the volume of machinery imports is up 11.5 per cent in the first quarter, reflecting the fact that Canadian companies are taking advantage of the strong exchange rate, EDC's Stone said.
"Last year's rise in M&E imports helped lead to a revised 5.4 per cent increase in manufacturing productivity."
Bay Street economists had mixed reactions to yesterday's trade numbers.
Some insisted that the March surplus — $1 billion lower than consensus forecasts — was so troubling that it could prompt the central bank to hold off hiking interest rates a further quarter point on May 24.
Excluding aircraft shipments, exports were down 0.1 per cent in March, and the downward revisions for January and February that were announced yesterday basically erase half of the gains in March, said Marc Lévesque, who is a chief strategist at TD Securities.
"On the one hand, the Canadian economy is operating at full capacity by any measure, and the domestic side of the economy is still powering ahead. At the same time, the export sector is not exactly blowing off the roof."
Plus, the Canadian dollar has risen more than 3 per cent since then, Lévesque added.
TD is still expecting the Bank of Canada will raise its overnight rate to 4.25 per cent later this month, but "the backdrop is becoming less convincing," he said.
Warren Lovely, an economist with CIBC World Markets, countered that strong imports point to a healthy domestic economy.
Also, he said "renewed vigour in energy prices sets the stage for improved trade fortunes in the months ahead."
Net trade will likely be a drag on gross domestic product growth this year but Canada has some important offsets, particularly robust consumer spending and a very busy construction sector, said Doug Porter, deputy chief economist at BMO Nesbitt Burns.
Furthermore, yesterday's imported machinery numbers highlight the fact that business investment spending will also fuel the economy, Porter said.
"We already had double-digit gains in both of the third and fourth quarter of last year, and it looks like that strength has carried over into the start of 2006."
The Canadian dollar initially sank half a cent yesterday morning following the release of both a weaker-than-expected surplus for Canada and a lower-than-expected U.S. trade deficit.
The loonie managed to claw its way back to its starting point, but then started plunging again, ending the day at 90.14 cents (U.S.), down 0.64 of a cent.
A volatile day in commodity markets triggered a sell off in Canadian dollars, said George Davis, director of foreign exchange at RBC Capital Markets.
"People are starting to become a little nervous of a price correction in commodities." |
