Canada's trade deficit widens to record

Canada's trade deficit with the world widened to $2.7 billion in July from $1.8 billion the previous month.

Statistics Canada said Thursday imports increased by two per cent as exports decreased by 0.7 per cent.

That's the largest trade deficit since the agency began to track the figure in 1971. For much of that time, Canada posted trade surpluses. Then in December 2008, with the global recession beginning, Canada's swung to a deficit, the first time since March 1976 that had happened.

Canada's trade balance has sagged by $3 billion in the past three months alone.

The prospects aren't getting any better, with the Bank of Canada raising interest rates Wednesday, giving another boost to the dollar, and a new forecast from the OECD pointing to a slowing global recovery.

"The dominant force is we went through a global growth spurt in the initial stages of the recovery, but that effect has dropped out," said economist Derek Holt of Scotia Capital.

"Then overlaid on top of that [is the loonie]."

A strong dollar is not only a drag on exports, but also tends to boost imports as Canadians take advantage of the currency's additional spending power to purchase foreign goods.

Imports rise

Imports were indeed stronger, and energy products accounted for more than half the growth in overall imports.

Continuing a trend visible since December, Canada's trade surplus with the United States alone fell to $1.2 billion in July from $2.4 billion in June, showing how much weakness in the U.S. economy is affecting Canada.

With a struggling economy, American demand for Canadian products continues to erode. Exports to the U.S. were down 2.2 per cent in the month, while Canadian exports to the rest of the world increased by 3.7 per cent.

"The deep deterioration in Canada’s trade picture in recent months is Exhibit A on how a cooling U.S. economy hits home," BMO economist Doug Porter said.

"Canada’s net external trade position is steadily eroding, keeping overall growth closely aligned with U.S. trends."

Jayson Myers of the Canadian Manufacturers and Exporters said he was "extremely concerned" about the health of the Canadian recovery.

"We are seeing higher interest rates when the government is cutting back on stimulus and employment insurance premiums are going up," he said.

"We are not out of the woods yet and won't be until the U.S. economy recovers."

Canada's Finance Minister Jim Flaherty scoffed at suggestions that the government must do more to stimulate the economy and instead called on the private sector to "step up to the plate" to help the economy get back on track.

"I think Canada does need new growth, but Canada is not government," he told reporters during a speech in Waterloo, Ont. "Canada includes a very large private sector. An engine of growth in the economy isn't the government. The engine of growth is the private sector. We need the private sector to continue to step up, start to invest.

"They have been making some profits, they have got some cash, and we need them to start investing to help create more jobs than we have already seen created in Canada."