May 6, 2015 / 4:54 PM / 2 years ago

Record Canada trade deficit masks non-energy export strength

A tugboat pulling a transport truck on a barge crosses the harbour beside the container port in Vancouver, British Columbia June 8, 2012. REUTERS/Andy Clark

OTTAWA (Reuters) - A record Canadian trade deficit in March caused by plunging oil prices has masked an encouraging trend - strength in non-energy exports that the central bank is counting on to revive economic growth.

The report on Tuesday showing gains for sectors like auto parts and forestry, combined with encouraging outlooks from some company executives, suggest the Bank of Canada’s forecast of an export-driven pickup in growth later this year is taking shape.

Auto parts in particular is “a sector that’s getting fired up,” said Peter Hall, chief economist with government export agency Export Development Canada (EDC). EDC sees 13 percent growth in automotive exports this year, helped by U.S. auto plants “bursting at the seams.”

Trade data showed automotive exports up 12.9 percent from a year earlier, while forestry, building and packaging material exports climbed 25.0 percent.

The pickup is benefiting companies like Guelph, Ontario-based Linamar Corp, which expects double-digit sales growth this year and is expanding its Canadian facilities to meet new orders.

“We have an enormous amount of new business,” Linamar Chief Executive Linda Hasenfratz said in an interview.

Canadian National Railway Co Chief Marketing Officer J.J. Ruest told analysts last month that the automotive and forestry sectors were bright spots for the carrier.

Foreign sales by the automotive sector, along with forestry and machinery and equipment, together amounted to close to the C$142.0 billion ($117.71 billion) energy exports registered in 2014.

EDC sees forestry exports up 7 percent this year and industrial machinery and equipment exports rising 14 percent, with both sectors feeding off a U.S. rebound and bolstered by a soft Canadian dollar.

Still, growth in these sectors has not been enough to offset the oil shock so far in 2015. It is now a given that the first quarter was lousy for the Canadian economy, with perhaps zero growth.

But the Bank of Canada has forecast non-energy exports and other positives in coming months will be enough to boost growth to as high as an annualized 2.8 percent by the third quarter.

Governor Stephen Poloz, speaking to reporters in Washington on April 17, noted non-energy exports of goods and services had risen very strongly for four quarters in a row.

“Given what’s going on in the U.S., and given what has happened on the exchange rate side. ... I just think that trend is going to continue,” he said.

If it does, Poloz has suggested his surprise interest rate cut in January will not be followed by further easing. Investors would then have to start preparing for a possible rate hike next year.

To be sure, many economists are skeptical. David Madani at Capital Economics said policymakers have been waiting for the same export-led recovery for the past two years and predicted the energy sector downturn and would dominate economic headlines.

“This is much more wishful thinking by policymakers,” he said.

(Adds title and first name of Linamar executive, paragraph 6)

Editing by Jeffrey Hodgson

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