Canada’s trade surplus came in below expectations for July, but with the world economy breaking down economists were hardly surprised.

The trade surplus narrowed to a worse-than-expected $5.4 billion in July, and June’s results were revised down to $5.5 billion from $5.8 billion. “Global demand for domestic goods continued to diminish during the month. Exports lost ground for the third month in a row, led by lower energy prices and a sharp pullback in the auto sector,” says BMO Nesbitt Burns.

CIBC World Markets says that July’s numbers are only foreshadowing for more weakness ahead. “While still consistent with a healthy current account position, a further drop off in American demand has once again raised doubts about the sustainability of a heady trade surplus.”

“With a shattered U.S. economy expected to contract in the second half of the year, faltering export demand from America will continue to eat away at Canada’s trade surplus,” says CIBC. “Upcoming trade reports will undoubtedly be distorted by last week’s events, as cross-border shipments were delayed and factory production disrupted in the wake of the terrorist attacks in New York and Washington. While the current account remains safely in a surplus position, a trade-led contraction in Canada’s balance of payments position will become a common sight in coming months/quarters.”

RBC DS Capital Markets Research says, “Canada’s trade surplus is now $3 billion below the peak level in January and will likely wane further ahead. The more extended softness in U.S. demand combined with the disruption of merchandise trade flows following the September 11 event, will keep downward pressure on the surplus and reduce the likelihood that it will be a contributor to economic growth in Q3 and Q4. Judging the data we’ve seen so far for Q3, it would be reasonable to estimate flat-to-negative growth for that quarter.”

“Today’s trade data were of only secondary concern to the market,” notes CIBC. “Eroding exports will help push Canadian GDP growth into negative territory in the second half of the year, keeping the Bank of Canada very much on the rate-cutting path. We continue to see at least 75 bps (if not more) from the Bank by early 2002.”