Canada’s merchandise trade deficit shrank to near-zero in March, as a surge in demand for Canadian goods, especially among non-U.S. trading partners, lifted exports to record levels.

Statistics Canada estimated the trade deficit at a thin $135-million for the month, down from $1.1-billion in February. The deficit was much smaller than economists’ average estimate of $1-billion.

The main contributor was a rebound in exports after an off month in February – returning Canada’s trade data to the improved tone of recent months that has been fed by a strengthening U.S. and global economy, a relatively weak Canadian dollar and generally improved energy commodity prices.

Exports jumped 3.8 per cent in value in the month, to a record $47-billion, more than making up for February’s hiccup. Most of the gains were due to stronger volumes, up 2.5 per cent, although they were also aided by a 1.3-per-cent rise in prices. The gains were broad-based, with energy, consumer goods, metal and mineral products, forest products, and the aerospace sector all showing strong gains.

“Exports in March were hot, and that’s an early sign that the Canadian economy carried some momentum into the second quarter, after a scorching start to the year,” said Canadian Imperial Bank of Commerce economist Nick Exarhos in a research report.

Exports to markets outside of the United States, Canada’s biggest trading partner, surged 15 per cent month over month, to a record $12.6-billion, or 27 per cent of the month’s total. While recent growth in non-U.S. exports has been encouraging, particularly in light of the steady stream of protectionist rhetoric coming from the United States since last fall’s election of President Donald Trump, the big gains in March may prove to be only temporary. It was driven substantially by a big jump in demand for Canadian coal in Asia, after Cyclone Debbie disrupted coal shipments from Australia.

Despite the improvement, goods trade did remain in the red for the second straight month, after a three-month string of surpluses from November to January. For the first quarter overall, Canada posted a trade deficit of $1.1-billion, as growth in imports (up 2.6 per cent) outpaced exports (up 1.7 per cent).

That implies that net trade subtracted from Canada’s gross domestic product in the first quarter, after being the biggest net contributor to the country’s relatively strong fourth-quarter GDP growth of 2.6 per cent annualized.

Still, economists noted that the March trade data also showed strong gains in imports of industrial machinery and equipment to Canada, evidence that Canadian companies stepped up their spending on expanding and upgrading their operations. Falling business capital investment has been a major drag on Canada’s economic growth over the past couple of years, but economists are cautiously optimistic that investment will turn the corner this year. On a volume basis, machinery and equipment imports were up a solid 5 per cent in the first quarter.

Even with net trade subtracting from first-quarter GDP, economists still believe the economy generated strong gains in the quarter, aided by a buoyant consumer sector and booming regional housing markets. Most forecasters peg growth in the quarter at about 3.5 per cent annualized.

Economists said that expected further improvements in the U.S. and global economies, coupled with the continued weakness of the Canadian dollar (trading at 14-month lows against its U.S. counterpart Thursday), should keep the fire lit under exports this year. However, the looming danger is that the U.S. will follow through on its protectionist threats and impose concrete measures that would damage exports to Canada’s biggest market – which could quickly change an otherwise encouraging landscape for Canadian trade.

“The main risk to this outlook is potential trade restrictions emerging from the Trump administration that will limit the extent to which Canadian exporters will be able to benefit from a strengthening U.S. economy,” said Royal Bank of Canada assistant chief economist Paul Ferley in a research note.

The Globe and Mail
Published Thursday, May 04, 2017 8:41AM EDT
Last updated Thursday, May 04, 2017 11:18AM EDT