Canada's trade deficit shrinks

Canada's merchandise trade deficit with the rest of the world narrowed in the final month of last year, but economists noted the improvement was all on the imports side and the further decline in exports would impact economic growth.

The Statistics Canada report Friday found the deficit closing to $901 million in December from $1.7 billion a month earlier, on the surface a welcome trend in an indicator that has underperformed most of 2012.

The weakness was found in the details. Exports, which represent about a third of the Canadian economy, fell for the second consecutive month, this time by 0.9 per cent to $37.6 billion.

It was far worse in volume terms, which more directly correlates to economic production. In real terms, shipments fell 2.1 per cent.

"It was a disappointment, but I'm going to continue to view it as a transition period," said Peter Hall, chief economist with Export Development Canada. He points out that most of the critical indicators in the U.S.a market that absorbs about three quarters of Canada's shipments, from auto purchases, to consumer spending to housing startsare all pointing up, suggesting Canadian exporters should be able to profit.

December's data showed shipments heading south to Canada's largest trading partner fell four per cent to $27.6 billion, narrowing the traditional surplus in Canada-U.S. trade by $1.1 billion.

Hall said a likely explanation is that U.S. federal budget concerns that dominated headlines late last year, as well as Hurricane Sandy, caused some producers to hold back and await developments. But given the strong demand, that should reverse.

"Otherwise I can't see any rationale why Canada would be on the losing end of a good story," he said.

Nevertheless, the December underperformance in both exports and imports will take a chunk out of fourth quarter economic growth in Canada, analyst David Madani of Capital economists said. He estimated the economy likely was moving at a snail's pace of one per cent in the last three months of the year.

Signs of weak economy

The improvement in the trade gap was all due to a sharp 2.8 per cent decline in imports to $38.5 billion, another signal of weak domestic demand.

Madani agreed that the drag from exports may be retreating. He pointed out that exports likely declined by 2.5 per cent annualized in the last three months of 2012, but that's an improvement from the nine per cent drop in the previous quarter, and 2013 is expected to show further progress.

Overall, Statistics Canada calculated that exports to the United States fell four per cent to $27.6 billion in December. As a result, Canada's long-standing trade surplus with its largest and nearest trading partner closed to $3.5 billion from $3.8 billion in November.

That loss was partly offset by an 8.5-per-cent increase in exports to other countries in the world to $10.0 billion. That meant Canada's trade deficit with other countries was reduced to $4.4 billion in December from $5.5 billion in the previous month.

On an industry basis, the agency said exports of energy products and motor vehicles and parts were among the biggest contributions to the weak December trade performance, while shipments of metal ores and non-metallic minerals increased by a strong 26.3 per cent.

The trade balance isa measureof how much Canadaexports compared to how much is imported.