Canada's economic resurgence took a blow to the midsection Tuesday, as a surprise return to a trade deficit in February sounded a note of caution about a core component of the country's good-news growth story.
But for a Bank of Canada that has resisted embracing the faster-growth tale, the trade disappointment couldn't have come at a better time.
Statistics Canada reported that merchandise trade swung to a $972-million deficit in February, from January's surplus of $421-million, marking a disappointing slump back into the red after a string of three straight surpluses. It was a far cry from the $600-million surplus that economists had anticipated.
What's more, the size of the January surplus was slashed by nearly half, from an originally reported $807-million. Combining the February miss with the January revision, and the trade numbers for the year to date are nearly $2-billion short of where economists had previously believed.
Exports, a key driver of Canada's economic growth, hit a pothole – down 2.4 per cent month-over-month, all of it due to lower volumes, rather than price declines. Volumes of non-energy exports, on which the Bank of Canada's vision for the economy's full recovery is largely pegged, fell 2.9 per cent, the latest discouraging dip in an up-and-down drift that has going on for months.
Just days after the release of a dazzling gross domestic product report for January (up 0.6 per cent month over month), the drop in export volumes already signals that the party didn't last.
"We do indeed seem poised for some slippage in output after a remarkably strong January," said Canadian Imperial Bank of Commerce economist Nick Exarhos.
On one level, this will be worrisome for the Bank of Canada, which is entering deliberations for its April 12 interest rate decision and quarterly economic forecasts. The lack of consistent traction on non-energy exports is certainly problematic for the central bank; it sees those exports as a crucial ingredient to returning the economy to full capacity by the middle of next year, its current expectation.
But the bank won't be heartbroken by the trade disappointment.
It has clearly been uneasy with the recent enthusiasm over Canada's accelerating economic pace, and the resulting talk that surging growth would press the central bank to raise interest rates sooner than expected. It has continued to stress the downside risks to the economy even as the upside to growth has emerged.
That message was becoming increasingly hard to swallow as the stack of strong economic data grew taller. But now that it has been knocked down a notch with the trade report, the Bank of Canada has some breathing room.
The fresh evidence of uncertainty in export growth, given how important that segment is to the central bank's outlook, lends support to the bank's message that we're still in a fragile and risky environment. It may have at least delayed a complicated and delicate communications pivot.
But by the same token, Bay Street's economists, many of whom raised their first-quarter growth estimates last week in response to a surge in January GDP, aren't letting the trade disappointment shake their optimism. Most said Tuesday that they had already figured that both trade and the broader economy were due for a time-out. Many still think quarterly growth can come in at 3.5 to 4 per cent, annualized; it looks like they want to wait to see if the trade setback was a one-off.
There are some curiosities in the numbers that support that argument that February's downturn might be temporary. Most notably, canola exports plunged 34 per cent in a single month, accounting for a $280-million downturn alone. China, a big-but-volatile canola customer, appeared to step out of the market after months of heavy buying.
Indeed, China was a sluggish market for Canadian goods in general in February, with exports slumping 17 per cent, despite generally positive Chinese economic indicators. The Chinese New Year holidays, which overlapped late January and early February, may have played a role in the volatility in Chinese demand.
Regardless, it's a good bet that the weak trade data will infect other key indicators rolling out this month, especially in next week's manufacturing sales report for February. The month may at least deliver a stiff reality check to the rising tide of optimism – and inject the kind of caution into the outlook that the Bank of Canada favours.