Net Exports to Support Canada's Growth in the Fourth Quarter

Daily Forex Fundamentals | Written by RBC Financial Group | Jan 13 09 15:03 GMT |

Canada merchandise trade surplus came in at C$1.3 billion in November, less than one-half the forecasted C$3 billion surplus. October's surplus was revised down to C$2.3 billion from an initially estimated C$3.8 billion. The narrowing in the November current dollar surplus reflected decreases in both exports and imports, which fell 6.8% and 4.8%, respectively. In constant dollar terms, which measures the volumes of exports and imports after removing the effect of price changes, exports fell by 1.8% with imports declining by a stronger 2.3%. Current dollar exports fell in most major industry categories, with the largest single decline coming in energy products, which slumped by 19.4% as well as a 15% price drop and a 5.1% reduction in volumes. Exports of automotive products, forestry products and industrial goods also declined in November with only agricultural products and machinery and equipment posting increases. In constant 2002 dollars, exports fell 1.8%, marking the eighth decline during 11 months of 2008. The decline in imports in November largely reflected a 36.5% drop in energy purchases, with prices off 19.6% and volumes falling by 34.9%. In constant 2002 dollars, imports fell by 2.3%, outpacing the weakening in exports and producing a narrowing in the real trade deficit to C$5.56 billion, the smallest since March 2008. The drop in import volumes in October and November outpaced the decline in export volumes. We expect that the combination of the financial market crisis and deepening U.S. recession will continue to curtail export demand with import demand likely to weaken with Canada's economy having slipped into recession late last year. On balance, the data point to net exports acting as a support to the economy in the fourth quarter. However, while the trade sector may help the growth outlook, the weakening labour market and the sharp the erosion in both consumer and business confidence have dampened spending, which we forecast will result in Canadian GDP contracting at a 2.5% annualized pace in the fourth quarter. With the data signalling that Canada's economy stalled in the fourth quarter, the Bank of Canada is likely to remain on its easing course following up December's aggressive 75 basis point rate cut with another 50 basis points ease next week. Inflation pressures have clearly weakened in recent months, with the headline rate being buffeted about by changes in energy prices and the growing slack in the economy likely to rein in core prices in the months ahead. Our base line view is that the Bank will lower the overnight rate to 1.00% and hold it there throughout 2009 and into 2010. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.