June trade deficit soars

David Ljunggren, REUTERS

, Last Updated: 1:16 PM ET

OTTAWA - Canada’s trade deficit unexpectedly soared to a 21-month high in June on record imports of machinery and equipment, suggesting the domestic economy is still resilient and companies are using the stronger Canadian dollar to boost their competitiveness.

Statistics Canada said on Thursday the deficit hit $1.81 billion in June from a revised $954 billion in May, far higher than the $1.00 billion shortfall predicted by analysts. It was the largest deficit since the $2.31 billion recorded in September 2010.

Imports grew by 2.3% to a record $40.90 billion while the hard-hit export sector — struggling to cope with a strong Canadian dollar and weak markets — managed to eke out a 0.2% gain.

Imports were boosted by a 3.2% increase in imports of machinery and equipment, which hit a record $11.23 billion.

The federal government and the Bank of Canada — fretting about relatively poor levels of competitiveness — have long urged companies to take advantage of the strong dollar to invest in more modern equipment.

“The import picture does represent a positive on the domestic side of the economy, especially with respect to Canada’s businesses,” said Francis Fong of TD Economics.

“Imports of machinery and equipment have now surpassed their pre-recession peak ... a sign that businesses in Canada are making good use of their superior financial position,” Fong said in a note to clients.

In another sign the economy was doing relatively well, import volumes were up by 2.5% from May while export volumes increased by 1.1%.

Canada is a major energy exporter and the value of oil and gas shipments can vary depending on the strength of the Canadian dollar. Energy exports in June dropped by 3.5% as prices fell for the fifth month in a row.

“The underlying trade metrics were stronger than implied by the headline with both imports and exports expanding during a month in which Canada’s export economy faced idiosyncratic challenges as well as global headwinds,” said Derek Holt and Dov Zigler of Scotia Economics.

The Canadian dollar was little changed against its U.S. counterpart on Thursday as initial negative reaction to the trade data was offset by comments from Bank of Canada Governor Mark Carney that signalled the central bank may still raise interest rates.

By 10.05 a.m. (1405 GMT) the currency was hovering around a three-month high of $0.9931 against the U.S. dollar, or $1.0069 US.

Exports are vital for the Canadian economy and accounted for around 31% of gross domestic product in 2011, which makes the sector particularly vulnerable to economic shocks such as the European debt crisis.

“Given the deterioration in the global economy over the first half of the year, it should not come as too much of a surprise to see net exports languish,” said TD Securities strategist David Tulk.

“Alas, this places an even larger burden on domestic demand, which has already done a considerable amount of heavy lifting and is beginning to look fatigued,” he said in a note.

Exports increased by just 0.2% as a 13.9% jump in exports of automotive products was largely wiped out by the drop in exports of energy products.

Exports to the United States — which took 74.1% of all Canadian exports in June — increased by 2.2%, while imports of U.S. goods grew by 3%. As a result, Canada’s surplus with the United States dropped to a 10-month low of $3.09 billion.