Canada's trade boom

Canada's external trade sector is volatile and hard to predict.  Something like 80 percent of exports go to the Unites States, despite decades of governmental efforts to diversify; hence the well-worn adage, "when the US sneezes, Canada catches pneumonia". And commodities, led by oil and gas, are a large part of the export mix, making Canada's trade performance heavily dependent on global developments over which the country has little influence.  But when things go well...

Statistics Canada reported today that Canada's merchandise trade surplus rose to C$ 5.3 billion in May, the largest for any single month since August 2008. Exports rose 4.1 percent in the month in nominal terms, the fifth consecutive increase; in volume (real) terms, exports rose a more modest 1.7 percent. Meanwhile, imports fell 0.7 percent in nominal terms and 1.4 percent in volume terms. 

The role of international price movements in the burgeoning trade surplus is easy to see. The value of exports is up 20 percent since the start of 2022, but in volume terms, exports are actually 2.3 percent lower. The biggest single contributor is energy: in May, energy accounted for 29.8 percent of Canada's total export earnings, the highest proportion ever. Much of the increase in this category represents sales to the United States; Canada's surplus in bilateral trade reached C$ 14.0 billion in May, the highest on record.

Will these good times last?  Disruption in energy markets caused by sanctions on Russia seems certain to persist for some time, which will support the underlying demand for Canadian energy. However, there are clear signs that the run-up in energy prices has peaked, which will limit the positive price impact on Canada's energy exports even if volumes hold up. To the extent that the pullback in energy prices reflects the possible onset of a global recession, other categories of exports may also start to be affected. Current outsized trade surpluses are thus unlikely to persist for much longer, but amid growing concerns over recession and stagflation, the export sector is for now a bright spot in Canada's economic picture.