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September 14, 2015

Will Canada Shake Off the Oil Shock?

Canada’s job market isn’t the only sector of the economy that’s trending in the right direction again. The country’s trade deficit narrowed dramatically in June and July thanks to a sudden surge in exports.
 
Making this recovery all the more remarkable, the trade deficit had hit a record high of CAD3.4 billion as recently as March and stayed within shouting distance of that level through the end of May.
But the rebound in exports over the past two months has confounded economists, who had expected only minimal to moderate improvement in the trade balance.
 
July’s deficit, which fell to CAD593 million from a revised CAD811 million in the prior month, was less than half the level of the consensus forecast, which had projected a deficit of CAD1.2 billion.
While the spring rally in crude oil prices, which hit a year-to-date high in June, was an obvious factor in that month’s improvement, exports continued to head higher in July, even as energy prices crashed anew.
 
A big part of the story is the falling exchange rate. The Canadian dollar fell 4.9% over the two-month period through the end of July, while exports jumped 7.9% in terms of total value over that same period.
 
The country’s policymakers have long hoped a lower exchange rate would help boost export activity among the non-energy sectors, particularly now that the oil and gas sector has shifted from boom to bust, and it seems that they’ve finally gotten their wish.
 
Indeed, the total value of exports in July, at CAD45.5 billion, was just 2.4% below the all-time high posted in July 2014, back when the price of North American benchmark West Texas Intermediate crude was still in the triple digits.
 
We had been worried that oil’s latest swoon would offset any gains in July, but those fears proved unfounded, at least so far.
 
Surprisingly, the consumer goods sector has done a lot of the heavy lifting. The category led the way in June and posted strong growth once more in July. Consumer goods were responsible for one-third of the rise in June exports and nearly 44% of the increase in July exports.
 
In July, consumer goods climbed 7.3% month over month, to CAD6.4 billion. On a year-over-year basis, the category was up 31.9%, for the single strongest gain by far among the country’s top-three export sectors.
 
But before we start resting too easy, it should be noted that one sub-category of consumer goods was responsible for most of July’s gain: precious metals and stones, most of which was jewelry bound for New York, according to Statistics Canada.
 
Perhaps New York-based jewelers were taking advantage of the lower exchange rate while accommodating the usual burst of demand from the summer wedding season. Whatever the reason, we probably can’t count on jewelry to help lead the way every month.

Meanwhile, motor vehicles and parts were the single biggest driver of export growth for July in terms of value, up 9.9% month over month, to CAD7.6 billion, and serving as a reminder of just how important the auto industry is to Canada’s economy.
 
And the aircraft category had the biggest gain in percentage terms, up 19.2% month over month and 41.5% year over year. But this sector accounts for a relatively small share of total exports, and its month-to-month swings can be volatile.
 
The big question is how enduring the rebound in exports will be. A number of economists believe exports will help spur a second-half turnaround for Canada’s economy.
 
“Canada’s economic soft patch is now in the rear-view mirror,” Toronto-Dominion Bank economist Diana Petramala told The Globe and Mail.
 
“The non-energy sector is expected to finally get that positive boost from the currency we have been anxiously waiting for,” she continued.
 
The Bank of Canada has been saying that most of the oil shock would be front-loaded toward the first half of the year. And economists are anticipating a marked improvement in gross domestic product (GDP) growth for the second half, with the consensus forecast showing a rise in GDP of 1.9% and 2.1% during the third and fourth quarters, respectively.
 
That’s a welcome contrast to the economic contraction we saw during the first six months of the year, regardless of whether you consider that a “technical” recession or otherwise.
 
In fact, the 0.5% decline in GDP during the second quarter masked the jump in growth during June. Hopefully, that sets the stage for a strong second half.

Courtesy Ari Charney for Investing Daily


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