Surprise improvement in February trade surplus signals recovery

BMO Nesbitt Burns says “It now looks like net trade will add to real GDP growth for the second straight quarter in Q1, versus our initial call of a moderate subtraction. That puts even a bit more upside risk to our latest estimate of 5.5% GDP growth for Q1. Overall, this report is quite a pleasant surprise for the Canadian economy.”

RBC Economics also forecasts the unexpected improvement in the trade surplus will bolster first quarter GDP, although it expects the contribution “will likely be somewhat smaller than the 1.5 percentage point added to growth in the fourth quarter of 2009.”

“Along with this addition from trade, we look for a third-consecutive, solid quarterly gain in final domestic demand and a reduction in the pace of inventory liquidation to be sufficient to maintain overall GDP growth at a 5.0% annualized rate in the first quarter of 2010, which would equal the strong gain recorded in the fourth quarter of last year,” it adds.

“This continued improvement in domestic demand, along with indications of sustained improvement in labour markets, is expected to prompt the Bank of Canada to begin withdrawing its current highly stimulative monetary conditions; however, the still-large amount of economic slack left over from the recent recession is expected to keep a lid on inflation in the near term allowing the pace of tightening to remain moderate,” RBC concludes. “We continue to expect that the Bank will not increase the overnight rate from its current 0.25% level until the second half of this year. We then expect a modest 25 basis point hike in July with the policy rate forecasted to finish 2010 at 1.25%.”

HSBC Securities (Canada) Inc. notes that apart from the positive surprise of running a decent surplus, it sees even better news behind the headline. “To be certain, the upside surprise rise in the trade surplus was a nice treat,” it says, adding that the report also indicated rising volumes for both the imports and exports, and good breadth as six of seven categories saw gains, and geographic dispersion with exports to Europe, the U.S., the OECD and all other countries all boasting gains.

“Why is this so important? For Canada to embark upon a sustained and balanced economic recovery, these are the kind of reports that we need to see,” HSBC stresses. “While the consumer, supported by a bed feathered in rate driven liquidity, has long carried the economic football for Canada through thick and thin, sustainable economic recovery necessitates that they be able to hand off the ball to both rising business demand and a recovery in external demand. On both points we are seeing movement and improvement.”

“This is a strong report that dovetails very nicely with the theme of sustainable economic recovery for Canada given the breadth of the gains. And not only from just an export standpoint but so too did we see import volumes also advance, suggesting growing cross border activity. An active border, an active economy,” it says.

“The importance of the recovery in external demand that is highlighted by this report to the Canadian economic recovery story cannot be underestimated,” HSBC says. And, it says that while the rise to parity for the Canadian dollar has been singled out as undermining external demand, “We would put forward that a growing global economic pie is more important to Canada’s external demand picture than the valuation of the Canadian currency. Under conditions of a shrinking economic pie, there is going to be no growth in demand volume at any price, regardless of how the currency is priced.”

IE