Canada's trade deficit unexpectedly narrowed in November on the combination of a sharp decline in imports of energy products and machinery and a modest increase in exports.
The trade deficit in November declined to C$81 million ($81.8 million) from a revised C$1.48 billion the month before, Statistics Canada said Thursday.
Market analysts had predicted the deficit would widen to C$1.90 billion. It was the seventh consecutive month that Canada has run a deficit.
Stewart Hall, economist at HSBC Securities said that although the deficit "tightened beautifully," the underlying data was not as strong with the improvement due to an incremental increase in exports and a slide in imports.
"For a small open economy like Canada's, an active border signals an active economy, and the border was not all that active," Hall wrote.
The data had little impact on the Canadian dollar, even though a narrowing trade deficit is typically positive for a currency. The report was overshadowed by U.S. jobless claims data that knocked the Canadian dollar lower.
Canadian exports in November rose by 0.8 percent to C$34.30 billion, boosted by both volumes and prices of industrial goods and materials.
Imports fell by 3.2 percent to C$34.38 billion, pushed down by lower shipments of energy products and machinery and equipment following recent increases.
Several analysts said that the 5.1 percent decrease in imports of machinery and equipment was a discouraging sign for business investment.
It "puts at least a temporary dent in our argument that Canadian business investment will be among the leading sources of growth in the overall economy," wrote Scotia Capital economist Derek Holt.
The surplus with the United States — by far Canada's biggest trading partner — rose to C$3.0 billion in November from C$1.71 billion in October.
Exports to the United States edged up as the U.S. economy showed signs of recovery, though exporters remain pressured by the strong Canadian dollar.
The United States took about 70 percent of Canada's exports. Around 75 percent of Canada's exports were going south of the border every month as recently as a few months ago.
Exports to countries other than the United States rose 1.1 percent for a fifth consecutive month of gains.
Overall, analysts said that the improvement in the deficit should add to economic growth in the fourth quarter.
"The steady tightening in the trade deficit for both October and November suggests that there is some decent upside that can be attached to the fourth quarter gross domestic product," wrote Hall.
Hall added if the areas that weighed on exports correct in December, "there is a compelling growth story for the final quarter of 2010."
In a separate release, Export Development Canada said its semi-annual Trade Confidence Index compiled between mid-October and early November came in at 74.1.
The government-owned export credit agency said the level is consistent with times of decent trade growth in the past, but that the index had declined from the 78.8 posted last spring as trade activity was rebounding.
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