Trade balance surprises to the upside: A new trend or a one-off reading?

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.




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9 Responses to Trade balance surprises to the upside: A new trend or a one-off reading?

  1. Ed Sager says:

    My BS meter just went right over into the red zone. StatsCan’s and the banks’ read on this makes me think they’re borrowing a page from ReMax.

  2. John in Ottawa says:

    We can see the trend was starting to turn in our favor. Prior to the recession and our strong dollar positive trade balances were the norm and we had a strong current account.

    It is the size of the surplus, particularly in the face of such a strong dollar, that is very surprising.

    Economies throughout the world are showing signs of recovery. The US printed a smaller trade deficit last month.

    Until the US ends Quantitative Easing (QE), all bets are off as far as I am concerned. Driving real interest rates to -5% and below is so distorting that nobody is completely sure what is going to happen when the Fed turns off the tap. Will the economy whipsaw? Steve Keen certainly thinks so.

    We can be expert on how finances work under normal circumstances, but there is just too much uncharted territory, courtesy of Uncle Sam, for there to be any certainty right now.

  3. Ray says:

    The big take away here is that BoC will normalize the emergency rates even sooner than thought (going up!). This is the only thing that your analysis gets wrong, they will have the balls to raise it with these numbers as their scapegoat.

    • John in Ottawa says:

      It will certainly make a move easier, but first Carney will need clear evidence that his target inflation rate of 2% is being breached.

      It is not Carney’s job to use interest rates to control consumer debt.

    • I’d love to believe you’re right. It is becoming increasingly likely that we will see at least one quarter point hike this year. Keep in mind, however, that credit demand is slowing as consumers hit their max. It’s highly likely the moves by the government to limit credit expansion will offset any rise in exports. How high do you see interest rates by the end of 2011? When do you foresee the first hike of the year?

    • jesse says:

      “It is not Carney’s job to use interest rates to control consumer debt.”

      Au contraire. It is the Bank’s prerogative to preemptively raise rates to reduce borrowing if, in the Bank’s view, escalating debt levels increase the risk of significant deflationary pressures in the medium term. He and his minions have stated as much in several speeches.

      It is no coincidence Hon Jim Flaherty has recently announced credit restricting policies; if he didn’t the Bank would be forced to raise rates sooner than would be best for bootstrapping investment.

      • John in Ottawa says:

        Well, this is a complicated area.

        Excessive borrowing is inflationary. Curbing borrowing is deflationary, or at least mitigates inflation.

        Flaherty did his job to take the pressure off the Bank. With less borrowing there is less inflationary pressure and a better chance the Bank can hold interest rates low.

        The Bank will not raise interest rates while inflation is low just to spank little Johnny and little Suzy. Low interest rates blow bubbles. That’s been pretty well demonstrated during the past 10 years.

        If Carney wanted to use interest rates to control consumer borrowing, he should have done it long ago. Instead, he got Flaherty to control borrowing through regulation, which in my view was the correct move.

        Interest rates are a very blunt instrument. They cannot be used to control just one segment of an economy.

  4. Debunking says:

    This is not a surprise. As I have said many times in this blog, this is consistent with the activity I see in our company and the subcontractors.
    Prepare for interest rates by CB to lag inflation rate for a long time, untill wages and everything else catches up with real estate prices. It is going to take a long time, maybe 15 to 20 years but that is what a soft landing in RE looks like. This kind of soft landing has been successfully managed in the past by other countrys (germany, Holland, france , belgium).
    I think this will become the most probable senario for the future of real estate in Canada.

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