UPDATE 2-Canada’s big import appetite boosts trade deficit

* Both exports and imports beat forecasts in May

* Auto trade explains over half of export gains

* Rate hike expectations intact for July 20
(Adds details)

By Louise Egan

OTTAWA, July 13 (BestGrowthStock) – Canada’s frothy economic
recovery fueled an import surge in May, boosting the country’s
modest trade deficit and suggesting another interest rate hike
may be warranted.

Statistics Canada said on Tuesday the trade deficit in May
totaled C$503 million ($488 million), up from revised
shortfalls of C$330 million in April and C$356 million in
March.

The median forecast in a Reuters poll had called for the
balance of trade to be flat in May, although several analysts
had predicted a small deficit.

Import and export growth both beat expectations by a large
margin, posting the biggest gains since July 2009, although the
country imported more than it sold abroad.

Normally a trade deficit spells bad news for economic
growth but analysts said second-quarter gross domestic product
figures would be less affected this time given the growth in
both import and export volumes as well as evidence of greater
business investment and consumer spending.

“The consumer and business sectors in Canada were on fire
as evidenced by a voracious appetite for imported capital and
consumer goods that also reflects the oft-ignored virtues of
Canadian dollar strength,” Derek Holt and Gorica Djeric,
economists at Scotia Capital said in a note to clients.

The trade numbers did nothing to dispel widespread
expectations that the Bank of Canada will raise its key
interest rate to 0.75 percent from 0.5 percent on July 20,
which would be the bank’s second rate increase following the
recession.

“We think these effects on net trade versus other
components of GDP growth like consumer spending and business
investment trade off against one another to still leave the
case for a Bank of Canada hike next Tuesday intact,” Holt and
Djeric said.

Francis Fong, economist at TD Securities, said Canada’s
export strength reflects continued recovery in the United
States and Europe.

“TD Economics expects net exports to detract from growth in
the next two quarters, with real export growth of 4-6 percent
and real import growth in the 7-8 percent range,” she said.

“This will likely change at the end of this year when the
U.S. economic recovery finds more solid ground and net exports
become a driver of growth by next year.”

Second-quarter GDP figures will not be released until the
end of August. The central bank’s latest forecast is for 3.8
percent annualized growth in the quarter, but it is expected to
tweak that number in its quarterly update on July 22.

AUTOS DRIVE EXPORTS

Exports jumped 5.2 percent to C$34.48 billion largely on
the strength of automotive products, which accounted for over
half the growth. Passenger vehicle sales to the United States
leapt to their highest level since December 2006.

Shipments abroad also grew for machinery and equipment as
well as agricultural and fishing products. Energy exports eked
out a 1.6 percent gain after three months of declines as
volumes rose despite a drop in oil prices.

Imports jumped 5.7 percent to C$34.99 billion on widespread
gains, including machinery and equipment and industrial goods
— a sign that businesses are expanding — as well as consumer
goods.

Canada’s trade surplus with the United States widened in
May to C$3.59 billion from C$3.46 billion on autos trade.
Meanwhile the nation’s deficit with countries other than the
United States widened to C$4.09 billion from C$3.79 billion.
($1=$1.03 Canadian)
(Reporting by Louise Egan; editing by Peter Galloway)

UPDATE 2-Canada’s big import appetite boosts trade deficit