Gas exports fuel surplus

$7 billion trade balance beats expectations Strong showing supports prospect of more rate rises

Surging natural gas exports drove Canada’s trade surplus to $7 billion in September, the highest level in 15 months and easily trouncing forecasters’ expectations.

Total merchandise exports hit a record $ 39.76 billion in the month, up 2.8 per cent, outpacing imports, which rose 1.4 per cent, to $ 32.75 billion, Statistics Canada reported yesterday. The surplus with the U. S. swelled by $ 1.3 billion, to $ 10.7 billion, the second- highest ever.

“ There should be no doubt that the export sector is adjusting rather well to the appreciation in the Canadian dollar,” said Marc Lévesque, chief strategist at TD Securities.

While much of the gains are due to high oil and gas prices, export volumes did climb 1.2 per cent in September, the fourth straight increase, he said. Net exports will contribute significantly to economic growth in the third quarter, as it did in the second, “ a far cry” from the drag trade had on growth in the second half of 2004, Lévesque added.

Higher natural gas prices, sent skyward by hurricanes Katrina and Rita, accounted for about three- quarters of the increase in the value of exports, StatsCan said.

Strong passenger vehicle shipments helped Ontario’s auto sector post a 2.9 per cent increase in exports, to $ 7.6 billion, the second straight monthly increase. Also, industrial goods rose by 1.3 per cent, to $7 billion. On the other side of the ledger, industrial goods imports increased 1.1 per cent, to $ 6.5 billion while consumer goods rose 2.7 per cent, to $ 4.2 billion. Machinery and equipment imports fell 0.6 per cent, to $ 9.2 billion, though they are still up 4.9 per cent from a year earlier.

Overall, yesterday’s trade report further cemented expectations that the Bank of Canada will continue raising its trendsetting interest rates over the next few months. The risk for the economy, said Derek Holt, assistant chief economist at the Royal Bank of Canada, is that rising interest rates and an improved growth outlook could put upward pressure on the Canadian dollar.

“ The Bank of Canada needs to tread carefully on this count.” The stronger-than-expected trade surplus caused the Canadian dollar to jump nearly half a cent in the minutes after the report was released, though the currency eventually gave back those gains. The whipsaw action in the exchange rate simply reflected speculators, who had bet on a stronger-than-forecast trade surplus, cashing in their profits, said Steve Saldanha, chief foreign exchange strategist at TD Securities.

“ It’s all short- term stuff. This is nothing fundamental.” The Canadian dollar ended the day at 84.02 ( U. S.), down 0.28 of a cent.

Falling energy prices will pull the loonie down to below 81 cents in the coming months, boding well for Canadian exporters, the Conference Board of Canada predicts, in its latest quarterly provincial forecast.

Ontario, in particular, can look forward to again leading the country in growth by 2007, following four years below the national average, the forecast said. The province’s economy is expected to expand by 2.9 per cent next year and 3.4 per cent in 2007, tying Alberta for top spot. Canada is predicted to grow by 3.1 per cent in both 2006 and 2007, after ending the current year with 2.8 per cent growth.

Ontario will benefit from robust business investment spending in the United States, said Marie-Christine Bernard, associate director of provincial forecasting at the Conference Board.

Healthy U. S. demand will also boost the province’s metal fabrication and chemical industries, Bernard added.