File photo of rail tanker cars used to move oil on a Great Western Railway siding, Shaunavon, Saskatchewan, August 27, 2015. Statistics Canada’s merchandise trade report for May showed the monthly trade deficit clocked in at a massive $3.28-billion.Bayne Stanley
Canada's export sector was supposed to be the beacon of hope that would lead the country's economy out of its oil-stained darkness. Instead, the latest disappointing trade statistics suggest the once-bright export outlook has descended into a thickening and uncertain fog.
Statistics Canada's monthly merchandise trade report for May, released Wednesday, showed the monthly trade deficit clocked in at a massive $3.28-billion in May, the second-biggest trade hole in history. The biggest? That would be just a month earlier, April, in which the deficit was revised to $3.32-billion from an originally reported $2.94-billion. Three of the four biggest trade deficits of all time have come in the past three months alone.
Ever since the value of Canadian exports hit an all-time high in January, they have been in a perplexing yet undeniable skid. National Bank of Canada economist Krishen Rangasamy said that based on the April and May numbers, the second quarter may well have suffered "the worst quarterly export slump since the 2009 recession."
"Barring a miraculous recovery in June, real merchandise exports are set to contract over 15 per cent annualized in the second quarter," he wrote in the report.
If you had a checklist of things to worry about in a trade report, the May data would check off an awful lot of the boxes. There were declines in both exports (down 0.7 per cent) and imports (down 0.8 per cent), suggesting lacklustre demand both domestically and in export markets. As weak as those declines were, they were actually flattered by higher prices in the month; in terms of volumes of shipments, the declines were even worse – export volumes slumped 2.3 per cent, imports were down 0.9 per cent. Industrial machinery and equipment suffered substantial declines in both imports and exports, further evidence of the lack of business investment in both Canada and the United States that is holding back economic growth.
And the poor showing could easily have been much worse, if the export sector hadn't dodged a bullet from the beleaguered energy sector. Economists had expected energy shipments to slump in May owing to the large-scale loss of production from the Alberta wildfires, but instead, energy exports surprisingly rose in the month. It would appear that some unexpected refinery downtime in Alberta freed up supplies for export and the industry was able to lean on inventories to make up the rest.
But the biggest disappointment of all was the deterioration of non-energy exports, which economists have been counting on to be a key driver of growth this year. Non-energy export volumes slumped 3.2 per cent in the month.
That's not the way this was supposed to be. When the Bank of Canada cut interest rates in the eye of the oil-shock storm in January, 2015, Governor Stephen Poloz expressed confidence that the falling Canadian dollar and the accelerating U.S. economy would eventually fuel an export boom outside the energy sector that would eventually lift the economy out of its oil slump – it was only a question of when.
But nearly a year and a half later, we're still waiting for an answer to that question. Eventually is proving as elusive as a rainbow on the horizon.
The Canadian dollar has been below 80 cents (U.S.) for a year now, and it almost certainly has been a boon to the country's non-resource exports. Non-energy export volumes for the first five months of 2016 are a healthy 4 per cent higher than in the same period in 2015. But as the currency has stabilized, the growth has lost momentum. Over the past three months, non-energy export volumes are up just 1.3 per cent from a year earlier; in May, they were just 0.7 per cent higher than the previous May. The currency still looks cheap enough to boost trade, yet the returns are diminishing.
None of this is anything new in the seven years since the Great Recession, which has already proven to be one of the most perplexing, frustrating, unsteady and unpredictable business cycles in history. It was two years ago that Mr. Poloz coined a phrase for the continuing series of economic setbacks in Canada and globally – "serial disappointment" – and the term, to much dismay, fits just as well today.
So far, the Bank of Canada has stuck to its "the sun will come out tomorrow" mantra, and has remained steadfast in its belief that non-energy exports are gradually leading the economy to the promised land, despite the occasional pratfall. But next Wednesday, the central bank comes out with its latest quarterly economic outlook, in which it must address not only stalling export momentum, but the economic blow from the Alberta wildfires and the global uncertainties arising from Britain's vote to leave the European Union. We're about to find out just how much the bank's optimism, and its timetable for a full economic recovery, has been shaken.