Canada’s central bank won’t love what the latest trade data says about the economy. Statistics Canada’s (StatCan) latest merchandise trade data shows a return to deficit territory in October due to surging imports. Demand is running so hot it’s seeking its fix abroad, while demand for Canadian goods is failing to keep up. The imbalance adds downward pressure on currency and upward inflation pressure, narrowing the Bank of Canada’s options.
Why Do I Care About Merchandise Trade?
Merchandise trade tracks goods crossing the border through imports and exports. Exports reflect demand for Canadian production and support domestic jobs, while imports signal that demand is being met abroad. The most important takeaway is that the trade balance, exports minus imports, signals whether growth is driven by production or consumption.
A trade surplus typically signals economic strength, with Canadians selling more than they buy. Growth driven by production rather than credit fuels jobs and income, reduces inflation pressure, and gives the central bank more room to cut rates over time.
Deficits are the opposite: Canadians consume more global goods than they produce, shifting demand and jobs overseas. Growth driven by imports leaves less income at home and adds inflationary pressure.
Canadian Trade Returns To Deficit As Demand For Imports Climbs
Canada’s merchandise trade balance is back in negative territory, but it wasn’t all bad news. The balance of trade fell to a $583 million deficit in October, reversing the surprise surplus in September. Imports (+3.4%) climbed to $66.2 billion, while exports rose 2.1% to $65.6 billion. This is a relatively minor deficit, but the fact that both imports and exports grew in tandem is something that deserves a breakdown.
Source: StatCan.
Imports showed broad-based growth from both consumer and industrial goods. It grew 1.3 percentage points faster than the exports, widening the trade gap despite both moving higher. Exports were insufficient to offset rising demands, reinforcing a reliance on imports to meet consumption. The monthly flip suggests the export growth is more of a blip than the economy turning a page.
Canadian Demand Is Strong Enough To Undermine BoC Rate Cuts
The widening trade gap isn’t good, but it doesn’t support the cooling economy narrative either. Quite the opposite—Canadian consumption is higher than demand for goods. Weak export momentum also limits Canada’s ability to grow without adding to inflationary pressures. A weaker loonie is often one of the key incentives motivating foreign demand, but that would make imports more expensive.
The Bank of Canada is unlikely to welcome these data points. The mix is wrong: strong consumption paired with soft global demand adds inflation pressure while doing little to address the productivity slump the central bank has repeatedly flagged.
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