August 11, 2011 / 3:12 PM / in 6 years

Gloomy trade figures likely to hit growth

OTTAWA (Reuters) - Slumping exports propelled Canada to a much larger trade deficit than expected in June, most likely slashing second-quarter growth figures to well below already modest predictions.

In a largely gloomy report, Statistics Canada said on Thursday that the trade deficit grew to C$1.56 billion in June from a revised C$1.04 billion in May. Analysts had expected a deficit of C$1 billion.

“The drag from net exports, in conjunction with the overall deterioration in confidence, will weigh heavily on the second quarter ... (which) will fall well below the Bank of Canada’s 1.5 percent forecast,” said Mazen Issa of TD Securities.

Canada relies heavily on exports, which accounted for around a third of real gross domestic product in 2010.

Exports fell by 1.7 percent from May while imports dropped by just 0.2 percent. After adjusting for inflation, real exports fell by 1.7 percent while imports were up 0.8 percent.

In part, the figures reflect continuing supply disruptions caused by the Japanese earthquake.

But they also underline manufacturers’ problems in dealing with a strong Canadian dollar, which hit a 3-1/2 year high last month, and weak demand in the United States, by far Canada’s biggest export market.

Exports to the United States fell by 2.4 percent while imports dropped 2.3 percent. The bilateral trade surplus slipped to C$3.63 billion from C$3.73 billion in May and the deficit with all other nations hit a record C$5.19 billion.

“Given the exceptionally soft trade performance -- the economy’s Achilles’ heel -- it now looks like Canada struggled to post any growth at all in the second quarter. We now estimate GDP rose at a microscopic 0.1 percent annual rate in the quarter,” said Doug Porter of BMO Capital Markets.

The Bank of Canada forecast in July that the economy would grow at a 1.5 percent annualized rate in the second quarter, 2.8 percent in the third and 2.9 percent in the fourth. This would be well down from first-quarter growth of 3.9 percent.

The forecasts, similar to a July Reuters poll, were made before the most recent bout of global financial market turmoil.

Prime Minister Stephen Harper said he had expected the trade deficit to widen, citing the strong Canadian dollar and the relatively strong performance of the economy.

“It continues to be argued that the economy’s going to grow. It will grow gradually and slowly along with the world recovery, and in that, as long as those remain the circumstances, the policy mix of the government of Canada is appropriate,” he said during a visit to Costa Rica.

Statscan said energy exports decreased by 5.1 percent on lower volumes and prices in June while exports of automotive products were off by 5.3 percent.

Imports of energy products fell by 11.7 percent while imports of machinery and equipment were up by 2.5 percent.

“What we see in these figures is momentum going the wrong way into the third quarter, a continued deceleration in exports,” said Peter Hall, chief economist at Export Development Canada.

“The solid imports are saying we still have this strong domestic economy but ... demand is at risk as well,” he told Reuters.

That solid domestic demand was confirmed in a separate Statscan report on Thursday that showed new home prices climbed 0.3 percent in June from May and by 2.1 percent from June 2010 -- the 18th consecutive year-on-year rise.

Additional reporting by Alex Leff in San Jose; editing by Rob Wilson

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