Canada trade deficit widens in September

Ottawa (Reuters): Canada’s trade deficit widened more than expected in September as exports to the United States tumbled to their lowest level in almost a year, signaling a further drag on an already uncertain economic recovery.

Exports to the United States, Canada’s biggest trading partner by far, fell 3.6 percent, hitting their lowest level since November 2009. The decline was largely due to lower vehicle shipments, Statistics Canada said on Wednesday.

An increase in exports to other countries was not enough to offset that decline, which contributed to a higher overall trade deficit of C$2.49 billion ($2.49 billion), up from a revised C$1.49 billion gap in August. The market had forecast a C$1.55 billion shortfall.

The September number came surprisingly close to the record trade deficit of C$2.74 billion, set in July on anemic U.S. demand.

A slowdown in the export sector this year due to weak U.S. demand and a strong Canadian dollar has fueled fears that Canada’s economic recovery could stall.

“It is some cause for concern, because what we’re seeing here is underlying weakness in exports,” said Doug Porter, deputy chief economist at BMO Capital Markets. “If the deterioration was largely due to a big run-up in imports, then I don’t think it would be all that much of a concern.”

Overall exports were down 1.7 percent in September to C$33.07 billion, below analysts’ forecast of C$33.98 billion. Automotive products, other consumer goods, as well as industrial goods and materials, led the decline.

The September numbers meant that export volumes were down for the third quarter, which is the first quarterly decline in over a year, since the economic recovery began, said Porter.

One positive from the report was that industrial goods and materials, and machinery, the two largest import sectors, recorded gains in September, said Eric Lascelles, chief Canada macrostrategist at TD Securities.

“The gain in imports does suggest that businesses are finally getting off the couch and starting to invest in machines and equipment and other productivity-enhancing things,” Lascelles said.

“Basically the bigger trade deficit gets offset by more business investment so you don’t quite end up at scratch, but you’re not too far under water.”

Overall imports rose by 1.2 percent to C$35.55 billion. That was above forecasts for C$35.40 billion, and was the highest level for imports since November 2008.

Import prices rose 1.1 percent in the month.

The Canadian dollar weakened before the report, but then gained strength afterwards, largely ignoring the report as the market focused on strong commodity prices, Lascelles said.

BMO said the trade deficit would act as a drag on gross domestic product growth in the third quarter and that it was the main thing holding back Canada’s economy from outperforming the U.S. economy.

Lascelles said that GDP for the quarter would still likely come in at around 1.5 percent annualized growth, in line with the Bank of Canada’s 1.6 percent forecast.