Canadian Net Trade Balance Back in Deficit in February

Highlights:

• The merchandise trade balance returned to deficit in February, posting a $1.0 billion shortfall following three-consecutive surpluses November through January.
• Nominal exports declined 2.4%, led by a 2.5% decline in the volume of shipments. Imports rose 0.6% in nominal terms and 0.5% in volume terms.
• Regionally, the return to a nominal trade deficit was led by deterioration in the balance of trade with countries other than the U.S. The Canadian goods trade surplus with the U.S. was little-changed in February.
• Export volumes are tracking little growth in Q1 alongside a jump in imports that leaves the real net trade balance tracking a 3 percentage point drag from Q1 annualized GDP growth.

Our Take:

A deterioration in the ‘real’ international trade balance in February (which occurred alongside the first nominal trade deficit in four months) suggests that net trade will likely provide a larger-than-expected subtraction from economic growth in Q1/17 than we previously assumed. We’re currently tracking a ~3 percentage point drag versus the 0.9% subtraction expected ahead of the report. A monthly pull-back in export volumes (led by an almost 3% drop in non-energy exports) also provides the first evidence that the three-month run of outsized monthly GDP gains November through January came to an end in February. Nonetheless, earlier strength – a 0.6% jump in GDP in January left the level of activity in that month already an annualized 4.1% above its Q4 average – still leaves GDP tracking in line with our monitoring for a 3.8% jump in Q1 as a whole and a silver lining in the recent trade data is that much of a sizeable import boost Q1 to-date has come from rising equipment imports that bode well for domestic equipment investment to bounce back into positive growth territory in Q1. Looking through monthly and quarterly data volatility, our view remains that underlying economic activity continues to improve at a modestly above-potential pace as weakness in oil & gas sector investment eases and the rest of the economy continues to grow.