Canada’s trade deficit widened to $3.34 billion in May – the second-highest deficit on record – increasing the probability of a cut to the overnight rate, according to analysts.
The increased deficit was related to a 0.6% drop in exports, which was the fifth consecutive monthly decrease. Imports saw a small increase of 0.2%.
“Looking ahead to the Bank of Canada interest rate announcement next Wednesday [July 15], today’s trade release works to reinforce our view that the lackluster performance of the Canadian economy will provide the needed push to trigger a rate cut,” said TD Economics senior economist Randall Bartlett.
Bartlett forecasts a 25 basis-point cut to the overnight rate, which will bring it down to 0.5%. He said this will likely remain in place until mid-2017 and will drive the Canadian dollar down relative to the U.S. greenback. This in turn could provide a much-needed boost to exports.
CIBC economist Nick Exarhos said the street was expecting a much narrower deficit, in the range of $2.8 billion. He supported Bartlett’s forecast for a rate cut next week.
The Bank of Canada surprised analysts in January by cutting the overnight rate 25 basis points to 0.75%, saying this was in reaction to a sharp drop in oil prices. The cut had been the first change to the overnight rate in more than four years.
The decrease in exports was driven in part by a 5.8% drop in metal and non-metallic mineral products exports. Metal ores and non-metallic minerals dropped 9.2%. These decreases were partially offset by growth in exports of aircraft and other transportation and equipment parts, up 10.3%. Motor vehicles and parts exports grew 2.7%
“The May trade data supports our view that the Canadian economy is struggling,” Bartlett said.
“Net exports are now expected to act as a drag on real GDP growth in Q2 as opposed to making a positive contribution.”
Bartlett said real GDP is now forecast to contract by 0.5-1% on an annualized basis in Q2. This would be the second consecutive quarterly drop.
On the release of this latest data, the Canadian dollar fell half a cent relative to the American dollar, to 78.26 cents U.S. As of press time, the loonie had rebounded slightly to 78.41.
