Canada's merchandise trade data for December continued to reflect a deterioration of global trade activity, with declines in imports and exports leading to a deficit of C$160 million, little changed from C$219 million the previous month, in line with expectations.

Exports contracted 1.2 percent on the month to C$63.0 billion, the lowest level since February 2022, following a 3.7 percent drop in November. Declines were widespread across 7 of 11 categories, led by a 7.6 percent decrease in energy, the third monthly decline in a row. In December, a US pipeline carrying Canadian crude oil temporarily closed, pressuring prices down as inventories rose, which combined with lower volumes. However, exports excluding energy rose 0.8 percent. Exports of farm, fishing and intermediate food products, down 9.9 percent, were another key downward contributor. By contrast, exports of motor vehicles and parts soared 21.0 percent, the largest advance since October 2021, reaching C$7.5 billion, the highest level since September 2020. Still, overall export volumes were up 0.9 percent.

Imports fell 1.3 percent in December after a 2.6 percent drop in November, with declines in 7 of 11 categories as well. Volumes contracted 1.9 percent on the month. Consumer goods imports fell 6.4 percent, marking a third consecutive monthly decline, led by pharmaceutical products. Covid medication and non-influenza vaccine imports decreased. Yet weakening household consumption also likely played a role as consumer goods imports excluding pharmaceuticals fell 3.4 percent in December. Also pushing imports down were motor vehicles and parts, which fell 6.0 percent after two months of increases. Energy imports rose 7.9 percent, bringing some positive offset.

In the fourth quarter of 2022, exports fell 2.5 percent and imports 1.4 percent, with volumes down 0.5 percent and 3.1 percent, respectively.

Regionally, the trade surplus with the US deteriorated slighlty to C$7.0 billion from C$7.1 billion as imports edged down 0.1 percent while exports fell 2.6 percent.

The trade deficit with countries other than the US narrowed for a seventh consecutive month, to C$7.1 billion from C$7.3 billion.

For 2022 as a whole, the merchandise trade surplus widened to C$20.1 from C$4.6 billion in 2021, after years of deficits from 2015 to 2020. The increase was due to higher exports (22.1 percent) driven by price appreciation, although imports rose noticeably as well (19.8 percent).

Econoday's Consensus Divergence Index is now at 11, indicating the Canadian economy has been slightly outperforming expectations.

December's trade balance is seen at a marginal C$0.2 billion deficit versus a marginal November deficit of $0.04 billion.

The merchandise trade balance measures the difference between imports and exports of goods. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade and can offer a guide to an economy's competitiveness. Nominal data are supplied with regards to principal trading partners and product classification.

Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect currency values in foreign exchange markets. This is particularly true for Canada which relies on exports and particularly those to the U.S. for growth. It should be noted that this report focuses solely on goods trade - it leaves services trade for the quarterly national accounts and balance of payments reports.

Imports indicate demand for foreign goods while exports show the demand for Canadian goods in the U.S. and elsewhere. The Canadian dollar is particularly sensitive to changes in its trade balance with the U.S. For the most part, Canada's trade balance is in surplus thanks to its exports to the U.S. Both the nominal export and import values are split into volume (real) and price components. This permits trade data to be analyzed for both changes in trade patterns as well as changing prices. This has been particularly important of late given energy price volatility and the impact on Canada's merchandise shipments. A word of caution -- the data are subject to large monthly revisions. Therefore, it can be misleading to form opinions on the basis of one month's data.

The bond market is sensitive to the risk of importing inflation. This report gives a breakdown of trade with major countries so it can be instructive for investors who are interested in diversifying globally. For example, a trend of accelerating exports to a particular country might signal economic strength and investment opportunities in that country.