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CANADIAN EXPORTS RISE ON U.S. INVENTORY RESTOCK, DEFICIT WIDENS AS DOMESTIC ECONOMY STRENGTHENS

• Trade deficit widens to $246 million from $201 mil­lion on the back of a 1.7% gain in exports and 1.8% gain in imports

• U.S. demand drives Canadian exports for the third consecutive month on massive inventory restock

Canadian international trade data for December indicated that exports grew for the fourth consecutive month by 1.7%, while imports grew by a slightly greater 1.8%. This caused the trade deficit to widen from $201 million to $246 million. For the third consecutive month, the main driver of export growth has been U.S. demand, in spite of all the talk sur­rounding its subdued recovery.

Though, this was not surprising. U.S. GDP data for the fourth quarter indicated that the American economy grew by 5.7% on an annualized basis and suggested a widespread restocking of depleted inventories. This was likely the main influence for such strong demand for Canadian exports. The trade surplus specifically with the U.S. widened in December to $3.7 billion from $3.4 billion in November on the back of a 2.9% and 2% gain in exports and imports, respectively. Consistent with this notion is the fact that much of the gains in exports to the U.S. were attributed to passenger cars, stocks of which were heavily depleted following the Cash for Clunkers program that ended last summer.

Total exports of passenger cars grew by an impressive 11.7% in December and were, indeed, the main driver of the headline export figure. In fact, exports in this sub-sector have already recovered fully to their pre-crisis level. Other big gainers were machinery & equipment exports and energy product exports which grew by 3.4% and 1.5%, respectively. On the import side, the gains were broad based, but largely driven by motor vehicle parts and crude oil imports which grew by 11.1% and 17.0%, respectively.

December’s figure rounds out the last quarter of 2009 in which the trade deficit improved slightly from $18.5 billion in the third quarter to $17.6 billion at annual rates in the fourth quarter. Thus, net trade will add to growth when fourth quarter GDP data is released later this month, but will likely be a drag beyond that. Although the U.S. inventory readjust­ment will continue, its pace will likely slow in the coming quarters; in addition, heavy uncertainty remains regarding the state of global demand in the face of an EU deficit crisis emanating from Portugal, Spain, and Greece. Thus far, the latter turn of events has been putting downward pressure on the Canadian dollar as a flight-to-safety mentality and questionable commodity demand has dominated investor sentiment. The dollar is down more than 4% since its recent peak hit in the middle of January and currently sits at 93.6 cents, thus improving overall export competitiveness

However, this is likely to be temporary. Talks of a German bailout have already calmed investors and once sentiment returns to looking at economic fundamentals, strug­gling overall demand originating from the EU and the U.S., our largest trading partners, and the strength in Canada’s domestic economy will likely drive currency investors back into the Canadian dollar and inhibit overall export growth.

In spite of the fact that we lack any robust recovery in exports, which yet sit 27.5% below its peak hit in July of 2008, we continue to expect the overall economy to grow in excess of 3% on an annualized basis in every quarter of this year with domestic demand the main contributor to that growth.

Francis Fong, Economist

416-982-8066

R.Paul Chadwick
TDCanada Trust
Manager Residential Mortgages
Tel: 905 334 4066
Fax: 905 332 1619
paul.chadwick@td.com
pchadwick.ca

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