Dollar's drop hides October's flagging trade picture

Canada's trade surplus narrowed marginally in October as the biggest one-month plunge ever for the Canadian dollar largely masked the country's deteriorating international sales picture.

Statistics Canada said Thursday that Canadians sold $3.7 billion more in products to foreigners than they purchased from other countries in October. The country's surplus in merchandise trade was $471 million smaller than in September and was anticipated by economists.

Still, Canadians actually bought fewer imports and exports, a sign that the country's trade picture is hurting — not helping — the national economy.

The largest one-month deterioration in the value of the Canadian dollar in October was the culprit, Statistics Canada said.

"Canada's international merchandise trade in October 2008 was greatly influenced by a 10.7 per cent decline … in the value of the Canadian dollar vis-à-vis the U.S. dollar during the month and by a sharp fall in energy, food and industrial material commodity prices on world markets," said the statistical agency in a news release.

Effect of the falling dollar

The sliding Canadian currency drove up the price of everything American in the month, and the value of what Canadians purchased from overseas rose, even though the actual trade picture was far different.

In October, Canada imported $39.7 billion worth of goods from other countries, a four per cent rise and the sixth month out of seven in which Canadians boosted their foreign purchases. But once the currency effect is adjusted, Canada actually bought 3.6 per cent less in the month.

The cost of imported goods spiked eight per cent in the month while the prices for exported goods also rose by 4.2 per cent, Statistics Canada said.

The constant dollar import reduction marked the second time in the past three months in which Canada purchased fewer goods from overseas sources.

In September, the country bought 5.8 per cent less from other nations, the largest tumble in this category since December 1991.

Flagging imports often are a sign of an economy in recession.

With Canada expected to grow at a pace of less than one per cent next year, the country's falling import level appears to be a sign of economic weakness, not strength.

"The outlook for trade isn't promising despite October's decent numbers," said Benjamin Reitzes, an economist with BMO Capital Markets in a morning commentary on the trade figures.

In volume terms, Canadian imports fell by 0.5 per cent in October compared with September.

Commodity price drop

Falling prices for oil and gas and other commodities helped the country's terms of trade despite the fact that Canada exports many of these same raw materials.

Because many of these commodities are priced in U.S. dollars, a rising U.S. greenback drove up the price of oil imports — mainly from Saudi Arabia, Norway and the United Kingdom — in the month.

But dropping prices for oil and other commodities partially offset the effect of the rising U.S. buck.

While a tumbling currency might boost import prices, the same dollar deterioration can reduce export prices, in this case, making Canadian goods more attractive to Americans and other buyers.

But that offsetting gain did not occur in October.

Once the effects of the slumping Canuck buck are subtracted, Canada exported 1.6 per cent less in value terms to other countries in October.

In volume terms, exports rose 0.5 per cent compared with September, according to BMO.