Canada’s trade picture continued to deteriorate in August as exports dropped for a third straight month and the deficit unexpectedly widened.

The trade deficit hit $3.4 billion, the fifth-highest on record, from $3 billion a month earlier (estimates were for a $2.6 billion trade gap). Exports fell 1 per cent and are down 11 per cent since hitting a record in May. Imports were little changed, but are down 6.1 per cent in two months.

Key takeaways

Exports are suffering one of their biggest tumbles ever over the past three months after touching records. That may fuel concern the nation’s currency has been accelerating too quickly. Canada’s dollar has advanced about 7 per cent over the past six months.

The slumping trade performance also means Canada’s expansion is losing a major engine in the second half of the year, reinforcing expectations its growth rate is poised to slow from levels over the past year rarely seen in the past couple of decades. Economists had been anticipating annualized growth of about 2.5 per cent in the third quarter, from 4.5 per cent in the second quarter.

Market reaction

The report reinforces expectations the Bank of Canada — which has been signaling it’s concern about the stronger Canadian dollar — won’t move ahead with another interest rate increase at a rate decision later this month.

The Canadian dollar dropped 0.5 per cent to $1.2539 per U.S. dollar at 9:54 a.m. in Toronto, and is down 3.4 per cent since touching a two-year high on Sept. 11. Swaps trading suggests investors are pricing in less than a 20 per cent chance of a rate increase at the Bank of Canada’s Oct. 25 decision.

What economists say

Nick Exarhos, CIBC Economics: “After a rough two months, it got uglier for Canadian exports in August…. That supports our call for a 2 per cent or so growth pace for the third quarter, and for the Bank of Canada’s ‘monitoring’ of the economy to translate into a pause in interest rate hikes.”

Robert Kavcic, BMO Capital Markets: “In case there was any doubt that peak Canadian growth is behind us, this report all but cements the case.”

Other details

In volume terms, exports declined 1.9 per cent and have fallen for three consecutive months for the first time since 2011. Real imports fell 0.2 per cent.

Non-energy exports are down for the third month in a row, dropping 2.8 per cent from a year earlier. Auto plant shutdowns that have been longer than usual continue to play a role, with shipments of motor vehicles down 0.5 per cent.

It’s only the second time in the last three decades that exports have declined by more than 10 per cent in three months outside of a recession.

Energy products, precious metals, and motor vehicle exports — in that order — are the three biggest drivers of the three-month slump. Electronic and electrical equipment exports (2.5 per cent) and energy production (1.5 per cent) led gainers in August.

Bloomberg