Canada's December Trade Surplus Unexpectedly Rises

Daily Forex Fundamentals | Written by RBC Financial Group | Feb 10 12 15:08 GMT The Canadian merchandise trade surplus improved sharply to $2.7 billion in December 2011 from a revised $1.2 billion level (previously $1.1 billion) in November. Expectations for the December surplus had been for a deterioration to $0.8 billion.The improvement in the surplus in December resulted from an impressive $1.8 billion (4.5%) increase in exports that added on to an already sizeable $1.3 billion (3.4%) gain in November. The overall improvement in the surplus was marginally tempered by imports rising $0.3 billion (0.8%) that almost fully offset $0.4 billion (1.0%) drop the previous month.Excluding the effect of prices, the real trade deficit now shows an unexpected improvement in the fourth quarter of 2011 as a whole and looks likely to add 1.7 percentage points to fourth-quarter 2011 GDP growth after providing an outsized 5.0 percentage point addition in the third quarter of 2011. This addition, however, along with indications of strengthening consumer spending will be partially offset by an expected slowing in government spending. As well, we assume that some of this increased export demand will be met by running down inventories. This is expected to leave GDP growth at a relatively subdued 1.5% in the fourth quarter, which would be down notably from the 3.5% gain recorded in the third quarter.

The strength in exports was relatively broadly based with eight of the nine major components showing increases in the month. The rise was led by gains in machinery and equipment ($0.6 billion or 9.2%), automotive products ($0.4 billion or 6.7%), and industrial goods ($0.4 billion or 3.8%). The modest gain in imports largely reflected small gains in a number of components being partially offset by a $0.4 billion (7.5%) drop in the energy component, which largely reflected weaker volumes. Increases were led by gains in automotive products ($0.2 billion or 3.6%), industrial goods ($0.2 billion or 2.6%), and machinery and equipment ($0.1 billion or 1.3%). The gains in both imports and exports of automotive products reflected rising auto production in large part benefitting from rising US auto sales.

The marked increase in exports in December 2011 along with strong gains in previous months resulted in a sizeable 24.3% annualized gain in the measure in the fourth quarter of 2011 as a whole, which was up from an already robust 16.6% increase in the third quarter. This further strengthening in nominal exports in the fourth quarter was partially offset by an 11.8% rise in imports that marked a sharp acceleration from the modest 3.0% gain in the third quarter. Controlling for the effect of prices, the real trade balance now shows an unexpected improvement in the fourth quarter with a 7.0% annualized gain in export volumes outpacing a minimal 0.5% increase in the volume of imports. This suggests that net trade likely added 1.7 percentage points to annualized fourth-quarter 2011 GDP growth, thereby adding further to the outsized 5.0 percentage point addition in the third quarter. This will contribute further to indications of an improvement in consumer spending in the quarter. Some offset is expected from a slowing in government spending following the expiration of funding for infrastructure projects associated with the 2009 Economic Action Plan in October 2011. As well, we now assume that some of the export demand was met by drawing down inventories. This will leave GDP growth at a relatively subdued 1.5% in the fourth quarter of 2011, which would be down notably from the 3.5% gain recorded in the third quarter.

 

RBC Financial Group

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.