September 9, 2010 / 2:37 PM / 7 years ago

Canada trade deficit hits record, housing slows

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<p>A container ship departs Burrard Inlet in Vancouver, British Columbia in this March 6, 2009 file photo.Andy Clark</p>

TORONTO (Reuters) - Canada had a record high monthly trade deficit in July and the housing market stalled, data released on Thursday showed, signaling sputtering economic growth as the third quarter got under way.

The weaker data came a day after the Bank of Canada raised its key interest rate by a quarter point for a third straight time this year, bringing the rate to 1 percent. But the bank also cautioned that a weak U.S. economy would hamper Canada's recovery.

The Canadian dollar held at three-week highs against the U.S. dollar on Thursday, despite the soft data, while bonds stayed lower.

Canada's trade deficit rose more than three times expected to C$2.74 billion ($2.66 billion) in July as exports to the United States sank because of anemic demand, while overall imports surged to their highest level since November 2008, Statistics Canada data showed.

The shortfall compared with a deficit of C$810 million that was forecast by analysts in a Reuters poll.

Statscan also revised its estimate of the June trade deficit to C$1.81 billion from C$1.13 billion.

Exports fell 0.7 percent to C$32.80 billion in July, dragged down by weak demand for machinery and equipment and forestry products. But analysts were heartened by another jump in imports, up 2 percent to C$35.54 billion, led by energy products and autos, and above the forecast of C$34.70 billion.

"If anything, the continued surge in real imports of machinery and equipment early in Q3 will reinforce the statement made by the Bank of Canada that sees business investment rising strongly in the coming months," said Stefane Marion, chief economist at National Bank Financial.

"Trade will obviously be a drag on growth in Q3, but it is a reflection of resilient domestic demand in Canada."

The Bank of Canada has forecast annualized growth of 2.8 percent in the third quarter, following weaker-than-predicted 2.0 percent growth in the second quarter. The central bank is expected to update its forecast next month.

Canada's trade surplus with the United States narrowed to C$1.2 billion in July from C$2.4 billion in June as the stumbling U.S. economic recovery reduced demand for Canadian goods.

"Momentum was already leaning against third quarter GDP growth, and this month's deterioration has all but sealed a very weak Q3 bottom line result," said Peter Hall, chief economist at Export Development Canada.

Finance Minister Jim Flaherty said on Thursday he was concerned by the trade deficit and he called on the private sector to step up investment. Still, he said the relatively strong performance of the economy means Canadians have every reason to be confident despite global economic uncertainty.

Housing Sector Slows More

Housing starts fell in August for a fourth straight month and new home prices edged lower in July for the first time in 13 months, demonstrating further slowing in the sector, which had led the country out of recession.

Housing starts slipped a greater-than-expected 3 percent in August to a seasonally adjusted rate of 183,300 units from a downwardly revised 188,900 units in July, Canada Mortgage and Housing Corp (CMHC) said.

The monthly decline hit both urban single-family homes and multi-unit dwellings, which fell 3.6 percent and 3.7 percent, respectively.

Separately, the introduction in July of a new sales tax, which blends the provincial and federal taxes into one, in Ontario and British Columbia may have caused monthly declines in the housing index in those two provinces, Statscan said.

The new housing price index slipped 0.1 percent in July, against forecasts for a 0.1 percent increase. Home prices rose 0.1 percent in June.

Both housing measures add to months of data that has shown a less robust housing market, robbing the nation's economic recovery of one of its main drivers.

"Cooling housing markets are a big part of why domestic economic activity is slowing in Canada," said Pascal Gauthier, senior economist at TD Bank, adding homebuilding activity was easing at an orderly pace.

Most industry watchers say the once booming sector will avoid a U.S.-style crash, however.

On Wednesday, the Conference Board of Canada was the latest to add its voice to the debate, saying the next few months will likely not be "the best in history" for the resale and new housing markets, but that it was not the start of a steep downturn.

($1=$1.03 Canadian)

Additional reporting by Louise Egan, Howaida Sorour, John McCrank, David Ljunggren in Ottawa; editing by Peter Galloway

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