US trade deficit expands in June amid growing tensions

Jermaine Castillo
August 6, 2018

Imports fell 0.2 percent on lower volumes of energy products.

"We expect the trade deficit to continue to widen, as a fiscal-stimulus led boost to demand leads to higher imports".

Statistics Canada said the country's overall merchandise trade deficit with the world narrowed from $2.7 billion in May to $626 million in June, the smallest deficit since January 2017.

On Friday, Trump's chief economic advisor Larry Kudlow told Bloomberg TV that the administration will keep pressing China for trade reform after China on Friday announced a list of $60 billion in US goods that will be impacted by a new tariff.

Overall exports dropped 0.7 percent to $213.8 billion, despite record overseas shipments of petroleum and all industrial supplies and materials.

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But exports to non-U.S. markets fared even better, surging 8.7 per cent in the month.

The data underscored the importance to Canada of the United States, which took 73.0 percent of all Canadian goods exports in June.

Canada's largest trading partner, the United States, was the destination for a record $37.1 billion of exports, up 2.5 per cent - mainly because of passenger cars and light trucks.

"The widening of the trade deficit in June, after three consecutive months of narrowing, suggests that some of the transitory factors that drove those trends are starting to fade", wrote Pooja Sriram, an economist at Barclays, in a note to clients Friday.

June capped off a strong second quarter for Canadian trade.

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Many economists believe the looming trade dispute with China may also have contributed to an out-of-season surge in US soybean exports in the second quarter that could reverse going forward.

"After acting as a drag on the economy for the preceding three quarters, external trade appears to have provided a decent boost to GDP growth in the second quarter", said Stephen Brown, senior Canada economist for Capital Economics. Bank of Montreal formally raised its estimate to 3.3 per cent - a half percentage point higher than the Bank of Canada's most recent projection.

The trade surprise, when added to robust gross domestic product growth in May and June's six-year-high inflation number, adds to the likelihood that the Bank of Canada will increase interest rates this fall, economists agreed. The central bank has raised rates four times since the middle of past year as the economy has strengthened.

"The almost month-long burst of strength in the Canadian data brings some additional intrigue to the outlook for Bank of Canada policy, but there's still a long way until the next meeting in September", Bank of Montreal's Mr. Reitzes said.

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