Canada’s trade surplus narrowed more than expected in August, signalling that economic weakening was underway well before September 11.

“This morning’s report on Canadian merchandise trade was disappointing,” declares BMO Nesbitt Burns. “The surplus narrowed much more than expected in August to $4.4 billion from an unrevised $5.4 billion in the previous month, the lowest since the spring of 2000.”

It notes that the surplus with the U.S. shrank 3.5% to $8 billion, while the deficit with Japan and the European Union widened considerably. “Over the course of this year, Canada’s surplus has steadily deteriorated, although it is still poised to set a second consecutive record in 2001 of over $60 billion,” it says.

Broad-based weakness in exports was the culprit says RBC Capital Markets Research, noting that every major category experienced a contraction, except the automotive sector. The biggest downward monthly influence on exports was energy, which dropped 11.1%. “While high energy prices inflated our trade position at the turn of the year, the reversal in energy costs is draining some of the life from the surplus,” says BMO.

In a separate release, wholesale trade came in above expectations, up 0.8% in August. Sales of industrial machinery led the way, but were offset by weakness in computers and software. Wholesalers continued to run down their inventories, particularly in the household goods category, says BMO.

RBC says that the level of the surplus, however, is sufficiently high to maintain a current account surplus even against waning exports. The trade surplus would have to be below $3 billion to slip the current account into deficit position. “That seems unlikely on a sustained basis. In any event, the current account position is considerably better than the large deficits in the U.S. and other dollar bloc countries,” says RBC.

“Today’s international trade data is not good news for an already battered Canadian dollar,” concludes BMO. “The sharp U.S. economic slowdown and weaker natural gas prices are likely to cut into the surplus further in the months ahead. Still, Canada will maintain a small current account surplus this year.”