With economists and financial pundits debating whether Canada is in the midst of a recession, one key indicator offers hope that the worst is now over. After five consecutive months of declines, Canada’s exports surged by 6.3% in June, to CAD44.6 billion.

That stunning performance helped narrow Canada’s trade gap to just CAD480 million, down sharply from the near-record trade deficit of CAD3.37 billion in May.

Economists had expected the trade deficit to come in at CAD2.9 billion, so the actual number was obviously a big surprise. And it was also the lowest trade deficit since last November.

According to Statistics Canada, exports were strong in nine out of 11 categories, with both rising volumes and higher prices driving this performance.

Consumer goods posted the biggest gain, up 20.1% year over year, to nearly CAD6 billion, thanks in part to jumps in exports of pharmaceuticals and seafood. This category alone was responsible for wiping nearly CAD1 billion off the trade deficit.

Demand from Asian countries, particularly China, caused seafood exports to skyrocket nearly 130% month over month, with seafood accounting for almost 30% of the growth in exports for the consumer goods category.

Constrained seafood supply in some parts of the world has pushed prices higher, so the declining Canadian dollar has stoked demand for the country’s products by making them more affordable than those from other places. For instance, exports of lobster to the region have almost doubled since 2013.

There was also encouraging news on the resource front.

Exports of metals and minerals notched a solid gain, climbing 5.2% year over year, to CAD5.1 billion, with precious metals leading the way.

Forestry products also performed well, with exports rising 11.8%, to CAD3.1 billion. If the U.S. housing market continues to improve, this sector will be a key beneficiary.

And the all-important energy sector enjoyed a 3.7% increase in exports, to CAD7.9 billion. That was largely due to the rise in crude oil prices, which hit a year-to-date peak in June. By contrast, volumes declined by 0.7%.

Unfortunately, after seeming on the verge of stabilizing, crude plummeted once again in July. So it’s safe to say that the sector was likely a drag on overall exports in July.

Meanwhile, manufacturing saw exports rise by nearly 7%, and CIBC economists say there’s room for the sector to run higher after recent weakness.

Before crude oil collapsed, the Bank of Canada believed a resurgence in manufacturing exports could help spur growth in the broader economy. But the beleaguered sector’s progress has been halting, at best.

The central bank is hoping that a rise in exports will help boost business investment. That’s all the more critical now that the oil and gas sector, which had accounted for nearly one-third of the country’s capital expenditures, has made dramatic cuts to spending.

We’ve been monitoring imports of industrial machinery and equipment for a sign that business spending is strengthening. But imports in this category have grown by just 0.9% over the past year, hardly enough to suggest that business investment is on the rebound.

Part of the problem is that a lower exchange rate has made these imports more expensive for businesses that were already hurting from a troubled economy.

Overall, the lower exchange rate should help the economy find new growth in areas beyond energy and housing. But economists believe the Canadian dollar will need to remain at current levels for a considerable while longer for that effect to be fully felt throughout the economy.

And the lift from June exports may not be enough to keep Canada’s economy from contracting for two consecutive quarters.

With a federal election underway, there’s some debate over whether two quarters of negative growth qualify as a recession–the dreaded “R” word. Some refer to this as sufficient for meeting the threshold of a “technical” recession, though economists would say that this needs to be accompanied by significant weakness in the job market and other key areas.

Regardless of what you call it, the good news is that Canada’s economy is forecast to experience a meaningful recovery during the second half of the year. Economists surveyed by Bloomberg forecast growth in GDP of 2.2% during the third quarter, accelerating to 2.6% in the fourth quarter.

The Dividend Champions: Portfolio Update

By Deon Vernooy

Earnings season is now in full swing, and we are keeping a close eye on the progress of the Dividend Champions, with a keen focus on dividend announcements.

WestJet Airlines Ltd. (TSX: WJA, OTC: WJAVF) reported that second-quarter profits jumped 30% from a year ago.

Despite a sizable 7.5% increase in capacity, revenue rose by just 1.25%, due to a lower load factor. Cheaper fuel prices helped bring down operating costs, resulting in a substantial 23% increase in EBITDA (earnings before interest, taxation, depreciation and amortization).

Cash flow remains sound, supporting a solid balance sheet, which now holds net cash of CAD149 million.

WestJet also continues to buy back its own shares. And based on the current authorization, another 3 million shares, or 2.4% of shares outstanding, may be repurchased.

The stock’s valuation remains highly attractive, with a 2015 price-to-earnings ratio of 7.5, leaving it trading at a substantial discount to its peers.

The company increased its dividend by 17%, for a current yield of 2.5%.

WestJet is a quality operator in a competitive industry, and we believe investors will be well compensated for any risk. WestJet is a buy below USD20/CAD26.

Oil major Suncor Energy Inc.’s (TSX: SU, NYSE: SU) second-quarter results reflected a tough operating environment.

Despite an 8% increase in oil and gas production, price realizations averaged 38% lower than a year ago, resulting in a 10% decline in cash flow per share.

But the crash in oil prices has helped boost refining profits, which jumped 82%, to $1.1 billion.

Lower energy prices have also pushed down production costs. Suncor reported that its average operating cost in the oil sands is now at $28 per barrel.

The balance sheet remains in good shape, with a debt-to-capital ratio of 16%, supported by solid operating and free cash flow.

The quarterly dividend was increased by 3.6% compared to a year ago. And Suncor announced a share repurchase program of up to CAD500 million, which will allow the company to buy back up to 1% of shares outstanding.

The stock currently yields 3.2%, and though dividend growth will likely be minimal until energy prices recover, the payout remains safe.

Despite the challenging operating environment, the stock offers defensive exposure to energy production and refining. Suncor is a buy below USD28/CAD36.

Potash Corporation of Saskatchewan (TSX: POT, NYSE: POT), a top global producer of fertilizers, announced that second-quarter profits declined 12% from a year ago.

While the potash and phosphate divisions fared well, with stronger demand from China and India, the nitrogen division struggled with a 27% drop in profits as both prices and volumes declined.

The company incurred large capital expenditures between 2010 and 2014 to expand its production capacity. However, this spending is finally coming to an end, which should have a very positive impact on free cash flow, as well as the company’s ability to sustain its dividend and buy back shares.

Against the backdrop of ample free cash flow and a sound balance sheet, it was not surprising to see a dividend increase of 8.6%. The stock currently offers an attractive yield of 5.6%.

Potash Corp. now expects to deliver earnings per share of USD1.75 to USD1.95 for the full year, which will be, at the midpoint, about the same as 2014.

Despite some of the more promising developments, we are concerned that the company’s bid to acquire German potash and salt producer K+S AG entails considerable downside risk for shareholders.

Consequently, we’re downgrading Potash to a hold.

Fortis Inc. (TSX: FTS, OTC: FRTSF), the gas and electric utility, reported a 47% increase in earnings per share for the second quarter.

Overall, the results were pleasing, with profit increases reported by its electric utilities in Canada as well as its regulated utilities in the U.S. and the Caribbean. UNS Energy, the U.S.-based utility acquired by Fortis last year, also made a solid contribution.

Fortis has been hard at work this year unloading non-core assets and has now agreed to sell $888 million worth of commercial and hotel properties, as well as uncontracted energy generation assets.

The cash flows remain adequate and the balance sheet sound.

Fortis boosted its quarterly dividend by 6.25%, for a current yield of 3.6%. The company expects to grow its payout a further 6% per year for the next few years. Fortis is a buy below USD29/CAD38.

TransCanada Corp. (TSX: TRP, NYSE: TRP) reported a 19% increase in earnings per share for the second quarter.

The company had a good quarter, with both the pipeline and energy divisions reporting solid increases in profits before interest and tax.

Cash flow remains sound, although the debt level, at 59% of capital, is uncomfortably high. However, this risk is mitigated by stable revenue generated from the long-term contracts covering its pipelines.

The company increased its dividend by 8.3%, for a current yield of 4.1%. And management expects to grow the payout by 8% per year for the next few years. TransCanada is one of our favorite pipeline stocks and is a buy below USD42/CAD55.