Canada’s trade deficit widened to $2.7 billion in February (previously $1.9 billion), as the rise in imports (+1.9%) outpaced that in exports (+0.4%). In real terms, the picture was little changed, as imports were up 1.9% and exports rose 0.6%.

The gains in imports were fairly widespread, led by a 15% jump in energy products to the highest level since late-2014. Aircraft and other transportation equipment (+5.5%) and farm, fishing and intermediate food products (+4.7%) also posted decent gains, while metal ores and non-metallic minerals (-12%) provided some offset.

The rise in exports was led by a 20% rebound in the volatile aircraft industry and a 5% bounce back in motor vehicles and parts following plant closures in January. On the flipside, rail transportation issues in Western Canada resulted in a 17% drop in farm, fishing and intermediate food products during the month, with exports of wheat and canola each down by just over 40%.

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Canada’s trade surplus with the U.S. narrowed to $2.6 billion in February (from $2.9 billion) as the 1.9% increase in exports trailed the 3.3% jump in imports. Canada’s trade deficit with the rest of the world widened to $5.3 billion (previously $4.9 billion) with exports down 4.2% and imports falling 0.6%.

Key Implications

Trade got off to a rocky start this year, with February’s report confirming that net trade will likely weigh on growth in the first quarter. Still, overall economic growth is on track to advance by 1.4% annualized in Q1.

Going forward, an acceleration in economic activity south of the border and a loonie hovering below 80 US cents should help to improve Canada’s trade picture. That said, NAFTA renegotiations and concerns of a global trade war stemming from protectionist rhetoric from the White House leaves a cloud of uncertainty over the outlook.

While a trade war would be negative for Canada, disputes between the U.S. and certain countries such as China could lead to increased demand for some Canadian-made goods as involved countries look to fulfill their demand with different sources.

With the Bank of Canada in data dependent mode, this morning’s report is not going to do much to pull them off the sidelines. Indeed, given that economic growth in the first quarter is tracking well below the Bank’s 2.5% forecast and that there is significant uncertainty at present, it is likely to remain on hold in the near term, with another hike unlikely to come before the summer.

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