Canada's trade deficit narrows in May, US exports drop to lowest since pandemic

By Promit Mukherjee

OTTAWA, July 3 (Reuters) - Canada's trade deficit in May narrowed after a record-breaking deficit in April as total exports rose and imports fell even as the impact of U.S. tariffs dented shipments south of the border, data showed on Thursday.

The trade deficit in May met expectations at C$5.9 billion ($4.34 billion), down from a downwardly revised C$7.6 billion in the prior month, Statistics Canada said. Exports increased by 1.1% on a monthly basis after an 11% slump in April.

This was the first increase in exports in four months, Statscan said, and was driven by record exports to the rest of the world, excluding the U.S.

"The biggest takeaway I see from the data is just diversification," said Prince Owusu, senior economist with Export Development Canada.

"While we continue to bleed in the U.S., we are basically diverting trade to other markets," he said.

The share of the exports and imports with the U.S. dropped to their lowest levels in May, barring the pandemic year of 2020.

Exports to the U.S., Canada's biggest trading partner, fell for the fourth month in a row with May registering a drop of 0.9%.

In volume terms total exports were up 0.7% in May.

President Donald Trump has imposed 25% tariffs on imports of Canada-made automobiles and 50% tariffs on imports of steel and aluminum. Canada has also imposed retaliatory tariffs.

This trade skirmish between the two countries whose bilateral trade surpassed a trillion Canadian dollars last year has depleted Canada's exports and has hit the job market.

Canada's Prime Minister Mark Carney and Trump are aiming to reach some form of a trade deal by July 21.

Canada's total exports for May were C$60.81 billion, up from C$60.12 billion in April, Statscan said.

This category increased by 15.1%, driven mainly by exports of unwrought gold that were up 30.1% to reach a record $5.9 billion.

"Most of the rise was attributable to higher physical shipments of gold to the United Kingdom," the statistics agency said. Excluding metal and non-metallic mineral products, total exports were down 1.2%, it added.

As trade with the U.S. has dropped, Canadian companies have been scouting for opportunities to increase trade with rest of the world.

Exports to countries other than the United States rose 5.7% in May to reach a record high, Statscan said, but it was not enough to fully mitigate the impact of lost exports to the U.S., as well as China due to a drop in canola and crude oil shipments.

Total imports dropped by 1.6% to C$66.66 billion, with imports from the U.S. falling by 1.2% in May.

The Canadian dollar CAD= slightly weakened after the trade data and was trading down 0.23% to 1.3615 to the U.S. dollar. Yields on the two-year government bonds CA2YT=RR were up 3.7 basis points to 2.706%.

The deficit in May, albeit narrower than the prior month, is still among the highest seen historically and economists said that two months of decline will pull down the second quarter GDP .

($1 = 1.3592 Canadian dollars)