Canada Recovery Hits Snag as Trade Swings Back Into Deficit

(Bloomberg) -- Canada fell back into a trade deficit as exports declined by the most in almost a year, an unexpected setback following three months of surpluses.

The merchandise trade shortfall of C$972 million ($724 million) in February exceeded all 13 estimates in a Bloomberg survey of economists and was far worse than the median prediction of a C$600 million surplus. Statistics Canada also cut the January figure by about half to C$421 million.

February's swing was led by a 2.4 percent drop in exports that was the biggest since March 2016. Imports rose 0.6 percent, the third straight advance.

Exports and business investment have been the Achilles heel of Canada's economy since oil prices crashed at the end of 2014. Tuesday's report gives credence to Bank of Canada Governor Stephen Poloz's view the recent gains may be transitory. Policy makers will release their next interest rate decision and monetary policy report on April 12.

“We expect that tone to resonate at the next meeting,” Brittany Baumann, a macro strategist at TD Securities, said by phone from Toronto. “We still maintain a very cautious view,” she said. “What we really need to see going forward is that pickup in business investment and exports.”

Canada's dollar weakened 0.5 percent to C$1.3434 per U.S. dollar at 10:04 a.m. in Toronto, erasing the gain for the year.

Exports fell in eight of 11 major categories tracked by the federal statistics office:

• Agricultural products dropped by 10.6 percent from a record high, reflecting a 33.7 percent drop in canola products that had more than doubled in the past three months on demand from China.
• Total non-energy exports, a key measure tracked by the central bank on the strength of the recovery, fell by 2.4 percent in February.
• Aircraft shipments fell 23.1 percent, a third straight decline.
• Falling gold coin shipments to the U.S. led a 17.5 percent drop in the miscellaneous category.
• On the import side of the ledger, motor vehicles and parts climbed 1.8 percent.

Canada's economy remains on track for an annualized growth rate of at least 3 percent in the first quarter, according to Baumann and Nick Exarhos at CIBC World Markets. Gross domestic product climbed 0.6 percent in January, and February's full-time employment gain was the biggest since 2006.

The trade report was “one we could stomach after the stretch of figures that we've had already,” Exarhos wrote in a research note. Exarhos said the economy grew as fast as 4 percent in the first quarter on an annualized basis.

--With assistance from Erik Hertzberg

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Stephen Wicary, Chris Fournier