Canada’s trade balance moved back into deficit (-$972 million) in February, ending three months in surplus territory. Exports fell 2.4%, while imports rose 0.6%.
The weakness in exports was broad-based, with eight of eleven segments declining. The rise in imports was less broad, mainly focused in motor vehicles and parts, agriculture and special transactions trade.
The decline was mostly a volume story. In inflation-adjusted terms, real exports fell 2.5%, while imports rose 0.3%.
The widening in Canada’s trade deficit was entirely with countries outside of the United States where it rose to $5.4 billion (from $4.0 billion in January). Meanwhile, the surplus with the U.S. widened slightly to $4.5 billion (from $4.4 billion previously).
Key Implications
The pullback in exports is disappointing and overall net-exports will subtract as much as 2 percentage points from economic growth in the first quarter of this year. Nonetheless, with a string of strong releases and positive signals for domestic demand, we are still comfortable with our expectation for real GDP growth of 3.4% in the first quarter.
February’s weakness notwithstanding, the outlook for export growth in Canada remains solid. One of the brightest spots in the U.S. outlook over recent months has been manufacturing activity, which exhibits a sturdy and leading relationship with Canadian exports.
Potential changes to NAFTA continue to make headlines and will be a point of concern for Canadian policymakers. Still, given the depth of the two-way trading relationship between the two countries and encouraging comments from the U.S Commerce Secretary, we do not expect to see major changes to the agreement between the two countries.
