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Higher dollar, Lower demand for exports = Mortgage rates should remain low

General Angela Calla 13 Jan

Canada falls back into trade deficit as dollar, low demand stalls exports

The Canadian Press, 2010

OTTAWA – Canada was pulled back into a trade deficit in November as the country faced twin headwinds of both a strong loonie and weaker demand for exports, after a surprisingly strong performance the previous month.

The value of exports from Canada rose 1.1 per cent from October, but imports jumped 3.9 per cent, producing a deficit of $344 million. In October, saw Canada posted its first trade surplus in months at $503 million.

In terms of volume, exports fell a disappointing 0.1 per cent in November, Statistics Canada reported.

Economists say with the loonie worth nearly as much as the American dollar, and potentially reaching parity within the year, the prospects for 2010 remain bleak for Canadian exporters.

“Don’t look for a quick return to the halcyon days of big surpluses any time soon with domestic demand reviving faster than U.S. spending, and the Canadian dollar remaining lofty,” BMO Capital Markets economist Douglas Porter wrote in an analysis of the trade data.

On Monday, Prime Minister Stephen Harper blamed soft international demand and the strong loonie for the weakness in Canada’s manufacturing sector and slow jobs recovery.

But Export Development Canada offered some modest hope Tuesday, saying its semi-annual trade confidence index rose to 77.4 in the fall of 2009 from 68.5 during the spring.

“Trade is definitely in a growth mode, but we can’t forget the starting point,” said EDC chief economist Peter Hall. “Canadian exports took a 20 per cent hit in 2009, six times greater than any annual decline in recent memory. What exporters are saying is that they expect to start climbing out of that chasm.”

And Hall believes exporters will be getting a break from the currency in the latter half of this year, although many other analysts see the loonie remaining near or above par with the U.S. dollar for most of 2010.

“We think the drivers of the currency are out of whack with reality,” Hall explained. “Base metal prices seem a little too high and oil prices now are more indicative of an economy that is fully recovered than it actually is.” Hall says he believes the Canadian dollar will slump to about 86 cents US in the second half of 2010, about 10 cents US lower than its current level.

Still, economists are not looking for a quick turnaround in Canada’s trade performance.

TD Bank economist Dina Petramala said although goods exports are on track to record a 12 per cent annualized gain in the fourth quarter of 2009, she still expects Canada to stay in a trade deficit for most of this year.

She said weak U.S. demand for Canadian exports and the high dollar points to another year of struggle for the export sector. About 75 per cent of Canada’s exports head to the U.S.

As well, a strong dollar has the effect of making imports more attractive to Canadians, further exacerbating the trade deficit.

In November, exports increased to $31.6 billion benefiting on the higher price of oil – the fifth increase in six months – as prices rose 1.1 per cent.

But in volume terms, exports actually slipped 0.1 per cent. And excluding energy products, exports fell 0.3 per cent.

Meanwhile, imports to Canada increased by $1.2 billion to $31.9 billion, almost offsetting the declines of the previous three months.

Most import sectors posted gains, with automotive products, machinery and equipment, and energy products accounting for the bulk of November’s increase.

The exception was industrial goods and materials.

Exports to the United States rose two per cent while imports, which increased 3.8 per cent, accounted for almost two-thirds of the gain in overall imports.

As a result, Canada’s trade surplus with the United States narrowed to $3.2 billion in November from $3.5 billion in October.

Exports to countries other than the United States fell 1.2 per cent while imports from these countries increased four per cent.

Consequently, Canada’s trade deficit with countries other than the United States widened to $3.6 billion in November from $3 billion in October.