UPDATE 2-Canadian trade deficit climbs as Europe woes hit home

Wed Jul 11, 2012 10:58am EDT

* Canada exports flat, imports up 0.4 pct to new record

* Trade surplus with United States drops to 9-month low

* European crisis having an effect, say analysts

By David Ljunggren

OTTAWA, July 11 (Reuters) - Canada's trade deficit unexpectedly rose in May, pushed up by record imports while exporters struggled to make any progress in the face of the European economic crisis.

The May deficit edged up to C$793 million ($777 million) from C$623 million in April, Statistics Canada said on Wednesday. Market analysts surveyed by Reuters had expected a deficit of C$380 million.

Exports are vital for the Canadian economy and accounted for around 31 percent of gross domestic product in 2011. Exporters have for years faced challenges from the strong Canadian dollar, weak markets and increased foreign competition.

"It's not inspiring. It looks like the rest of the world is clearly having an impact on the numbers," said Peter Hall, chief economist for the Export Development Corporation.

"There really isn't a way of putting a good spin on it ... on balance this is a pause month," he told Reuters, noting that oil prices had fallen during May as markets fretted about Europe. Canada is a major energy exporter.

Exports were virtually unchanged at C$38.88 billion with an increase in volumes offsetting a fall in prices.

Imports grew by 0.4 percent to a record C$39.67 billion on a 3.7 percent rise in the value of energy products. Even though Canada is a net energy exporter, many eastern Canadian refineries buy oil from abroad.

The previous high for imports was the C$39.51 billion seen in April 2012.

"With weaker energy prices weighing on the trade balance, today's report continues to highlight the risks to trade from weaker resource prices given the current slowing global economy," said Emanuella Enenajor and Andrew Grantham of CIBC World Markets.

The data did little to move the Canadian dollar which at 10:10 a.m. (1410 GMT) was at C$1.0184 to the U.S. dollar, or 98.19 U.S cents, compared to C$1.0189, or 98.15 U.S. cents, shortly before the figures were released.

Exports to the United States, which took 72.6 percent of all Canadian exports in May, edged up by 0.2 percent after four consecutive month-on-month falls.

Imports though jumped by 1.8 percent, pushing Canada's trade surplus with the United States down to a nine-month low of C$3.23 billion from C$3.61 billion in April. The surplus was the smallest since the C$2.70 billion recorded in August 2011.

Analysts warned the data suggest trade is likely to be a drag on second-quarter growth, increasing the likelihood that the Bank of Canada will not raise interest rates this year.

"The external sector is likely to struggle further with renewed European headwinds and softer foreign demand," said TD Securities strategist Mazen Issa.

"For Canadian growth to transition towards net exports, it will have to ultimately rely on the U.S. ... Canada's trade surplus with the U.S. has been deteriorating and will limit the extent that Canada's external sector can grow this year."

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