The big news from this week was the shocking rebound in Canadian exports in December, which pushed the balance of trade (exports – imports) well into positive territory at a $3 billion surplus.
From Stats Canada:
Canada’s merchandise exports rose 9.7% to $37.8 billion in December, led by a 16.5% gain in volumes of energy products. Export volumes, up 6.6%, increased in most sectors. Prices rose 2.9%. Both volumes and prices have risen in 8 of the past 12 months.
You can see just how much this reading bucked the trend in the following chart:
The Stats Canada press release indicates that the gain was led by the volume of energy exports which surged by 25% in December. This is important in determining whether this is likely a one time event or a new normal. We’ll get to that in a minute. First, note how the data was received by BMO:
”…along came an absolutely astonishing Canadian trade report, which may just have single-handedly changed the economic outlook for this country in a stroke. While one should never put too much stock in a single monthly release, especially something as whippy as Canadian trade, it was nevertheless a wonder to behold.”
Wow! Heady stuff! Certainly this will serve to bounce the Q4 GDP reading higher. TD estimated that the surge in exports will add 7 percentage points to Q4 GDP growth which will now almost certainly be in the 3-3.5% range. There’s no doubt that it is good news for the Canadian economy. But is it the start of a new high plane in exports?
Sherry Cooper, chief economist at BMO weighed in on that questions:
”The big question is whether this was a one‐month wonder, or a sudden shift to a new higher plane for Canadian exports? Our best guess would be more the latter. ”
I would certainly be hesitant to project this sort of rebound in demand too far into the future. Much of the rebound has been in the way of increased trade with the US (though trade with other countries also jumped 13% month over month). With consumer spending still being buoyed by major (and unsustainable) tax cuts, there will certainly be headwinds to consumer spending once they move to restore the government’s balance sheets.
Perhaps more significantly, the massive jump in the volume of energy exports may best be explained by energy exports playing catch-up after several key pipelines were shut down earlier in the year, constraining supply to major markets in the US. It’s difficult otherwise to explain a 30% month-over-month jump in exports of natural gas (cold weather certainly helps, November was not particularly balmy either) as well as an 8% month over month jump in crude volumes.
Nevertheless, this does suggest that strength in Canadian exports will help cushion the blow of weaker domestic consumer spending.
I see two key points to take away from this data:
1) The impact of the tax cuts in the US and commodity demand elsewhere in the world may put upwards pressure on Canadian GDP throughout 2011 barring a correction in commodity prices and/or a significant slowing in Chinese GDP (a tail risk that seems as fat as a porpoise right now).
2) It is highly unlikely that we will see anywhere near this sort of trade balance over the next few months.