Canada's export sector has rebounded more strongly than expected despite the drag from US tariffs, with net trade poised to make a significant contribution to healthy second-quarter real gross domestic product growth, according to CIBC Capital Markets in a note.
Trade diversification has helped, with nominal exports to China increasing, said the bank. However, the strength of non-US exports looks less convincing when shipments to the UK are excluded, as much of the increase reflects gold shipments across the Atlantic.
"Overall, exports to the US are still a big part of the recent recovery," wrote CIBC Chief Economist Avery Shenfeld in Friday's note.
The outlook remains constrained by US tariffs and limited manufacturing capacity, added the bank. Years of weak investment and plant closures have pushed capacity utilization toward typical operating limits, limiting the scope for further export gains. Tariff uncertainty is also discouraging new investment.
The key near-term risk is the potential 50% US tariff on around 5% of Canadian exports due to come into effect next Wednesday. With Canadian Prime Minister Mark Carney aiming to secure a deal by that date, the outcome of the ongoing talks will be important for the export outlook, according to CIBC.
"We'll be watching for news on that front in the coming week or two," added Shenfeld.