Canadian economy headed in right direction as exports provide welcome boost

OTTAWA - Canadian exports to foreign markets surged by a surprisingly robust 3.5 per cent in May, narrowing the country's trade deficit and setting the economy on a more sustainable growth path.

For contribution to economic output, the Statistics Canada report was even more encouraging as volumes increased by an even bigger 4.2 per cent, as price drops shaved 0.7 per cent from the value of shipments.

The May data on one of Canada's most important economic indicators was stronger than economists' consensus forecast, but in line with what analysts had been anticipating would be the next stage of Canada's economic recovery, with exports and business investment replacing housing as drivers of growth.

Imports also rose in May, although by a smaller 1.6 per cent, bringing Canada's trade deficit to a slim $152 million from an upwardly revised $961 million in April.

"The export-driven recovery in the trade balance in May supports our expectation that net trade will provide a lift to growth in the second quarter even after accounting for the unexpectedly large deficit recorded in April," said Dawn Desjardins, assistant chief economist with the Royal Bank, in a note to clients.

"Additionally, the increases in imports were in part due to higher equipment purchases that likely signal a strengthening in investment growth," she said.

With the housing market and construction slowing, the Bank of Canada has been counting on an export recovery to boost business confidence and convince firms they need to invest in new equipment and machinery to expand production capacity.

On that front, there was more good news from the U.S. — Canadian exporters' largest market by far — with the American economy creating 288,000 new jobs in June, and exports receiving a boost there as well.

Markets saw the developments on both sides of the border as supportive for growth, lifting the Canadian dollar about a third of a cent to slightly above 94 cents US, one of the higher levels in several months.

"Economists, ourselves included, have been bemoaning the lack of export-led growth in Canada," said TD Bank economist Leslie Preston.

"However, Canada's trade position has been steadily improving since its post-recession low in mid-2012 (and we) expect Canada's export sector to continue to accelerate through the second half of the year in line with the U.S. economy."

Preston noted that Canada's exports are now 12.7 per cent higher than a year ago, a pace that hasn't been seen since the end of 2011.

The May trade data was strong in the composition as well as the bottom line, with a key contribution from the auto industries (plus 9.8 per cent) as well as the usually reliable energy sector, which rose 3.4 per cent.

As well, exports in consumer goods rose 4.4 per cent, and food products rose 10.5 per cent.

Overall, export values rose to $44.2 billion in May, while imports increased to $44.3 billion.

Exports to the United States rose 2.1 per cent $33.5 billion, while imports slipped 0.2 per cent to $28.7 billion, raising the trade surplus with the U.S. to $4.8 billion from $4 billion in April.

Exports to countries other than the United States grew 8.3 per cent to $10.7 billion, while imports from those countries rose 5.1 per cent to $15.6 billion, narrow that trade deficit to $4.9 billion from $5 billion in April.