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A container ship arrives at the port of Halifax.

STRINGER/CANADA/Reuters

Exports were supposed to be the engine of Canada's economic growth this year. Instead, they're acting as a drag.

Exports tumbled 4.9 per cent in February, outpacing a 4-per-cent drop in imports and slicing the country's trade surplus to just $33-million, trade figures showed Tuesday.

The weak showing will crimp first-quarter growth, economists said, and comes as the Bank of Canada is relying heavily on exports to drive growth. In its statement Tuesday, however, the central bank warned that improvements in exports will likely be "further restrained" by competitive challenges, exacerbated by the strong Canadian dollar.

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Exports haven't recuperated in the same way that other indicators - such as gross domestic product and net job creation - have bounced back from the recession. Canadian export levels remain 19 per cent below their peak of July, 2008.

The sharp drop in February's trade volumes "portends a slowdown in the Canadian economy in the second quarter of 2011 - a slowdown connected with less robust growth in the U.S., as well as major disruptions to North American vehicle output as a result of critical parts shortages from Japan," said Brian Bethune, chief economist for Canada at IHS Global Insight.

The persistent strength of the Canadian dollar hurts exporters' ability to compete abroad and is now showing up on their balance sheets. In recent weeks, gravel supplier Polaris Minerals Corp., lottery ticket company Pollard Banknote Ltd. and coffee firm Ten Peaks Coffee Co. Inc. have all said the Canadian dollar is hurting profits.

The Canadian dollar has been trading at its highest level in more than three years, though it fell Monday after the Bank of Canada kept interest rates on hold and highlighted its concerns over the strong currency.

The surplus narrowed in February, on lower exports of crude petroleum and cars, from a revised $382-million, Statistics Canada said Tuesday. Economists polled by Bloomberg had expected a surplus of $500-million.

Both imports and exports fell. Exports tumbled 4.9 per cent after four straight months of growth while imports slid 4 per cent.

The result is "the worst of all outcomes," said Stewart Hall, economist at HSBC Securities (Canada). "For a small, open economy as Canada's, cross-border activity is often indicative of the state of overall economic activity."

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The report comes a few days after the country's labour force survey showed little net creation in jobs last month, suggesting growth is slowing compared with the start of the year.

Lower volumes of both energy products and automotive products were the main reasons for the export decline as prices rose 0.3 per cent in the month, the agency said.

Import volumes, meanwhile, fell 4.3 per cent while prices rose 0.2 per cent. Again, most of the drop was due to lower volumes in autos and energy.

Exports to the United States fell 3.5 per cent after four months in a row of growth. Imports fell 6.1 per cent, leaving the surplus at $4.6-billion.

Exports to countries other than the United States fell 8.5 per cent amid lower shipments of precious metals to the European Union.

Energy exports fell 8 per cent, led by a drop in crude "reflecting higher inventories in the United States," the agency said. That follows a 71-per-cent increase in crude exports from September to January.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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