• Trade surplus expands to $5.5 billion in March
• Exports up 1.6% and imports down 0.3%

Continuing the trend observed in the first two months of the year, Canada’s trade surplus in March increased from $4.9 billion to $5.5 billion – far outpacing expectations of a drop to $4.5 billion. The expansion resulted mostly from a rise in exports, though imports fell slightly as well. While the headline figure suggests that Canada’s external sector has not been too badly hit by the economic slowdown experienced by its major trading partner, the details suggest otherwise. The 1.6% jump in exports was largely due to commodity price effects, as revealed by the 1.9% drop in export volumes during the month. For the full Q1, export volumes dropped by 4% (annualized). Similarly, the 0.3% drop in imports in March is much more pronounced once prices are taken into account, as real imports fell by 1.9% on the month, and by 5% in Q1 as a whole. The trade balance for the first quarter of the year, on average, was $4.4 billion.

Looking at the March results, energy products (+6.6% M/M) were a key source of export strength, exceeding $10 billion for the very first time. High natural gas and crude oil prices, coupled with higher volumes of petroleum and coal products, led to the significant rise in this sector, which now stands 37% above year-ago levels. Dampening the overall rise in exports was the drop in forestry products (-7.7% M/M) and automotive products (4.9% M/M). The continued deterioration in the U.S. housing market pulled down forestry exports to levels not seen since 1992, while sluggish demand and labour disputes pushed truck and motor vehicle exports to their lowest level in nearly 20 years. On a year-over-year basis, exports are down by about 25% in each of these sectors.

While the decline in imports was fairly widespread, the automotive sector was the main culprit, plunging by 11.4% on the month. Automakers were unable to import parts from the U.S. due to the labour disruptions in the motor vehicle parts industry. However, energy products (+17.6%) recorded a sizable gain in March, driven by a surge in natural gas imports as Canada moved to replenish inventories.

Look for more of the same in the second quarter of 2008.  Further sharp increases in commodity prices since March will provide a major kick to export values in the resource sector.  However, the positive impact of prices on the overall trade surplus will be offset by the growing impact of U.S. softness on export volumes, particularly in autos and forestry.  In addition, imports will hold up better overall, as Canada’s relatively strong domestic economy together with the high Canadian dollar, continue to keep demand well supported.  On balance, look for the negatives to outweigh the positives, leading to a lower monthly surplus in the range of $4-5 billion.

Dina Cover, Economist
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