Canada’s trade surplus blossomed in above expectations, in March, widening to $6.2 billion from $5.8 billion in the prior month. Economists at BMO Nesbitt Burns observe that the last four months have delivered the four largest trade surpluses on record.

The surplus in the first quarter was, “a staggering $75.8 billion. This puts the current account on course for a surplus of nearly $40 billion in the quarter, or nearly 4% of GDP. Given that Canada has run current account surpluses in only four of the past 40 years, this is astonishing.”

CIBC World Markets is more cautious, seeing the current account surplus heading for the $35 billion range. “But from a growth perspective, real trade developments were much less supportive during the quarter. Real exports suffered a double-digit annualized decline, while a pullback in real imports hints at a weak result for business capital spending in the Q1 GDP report. All told, we expect GDP growth to suffer through another lacklustre quarter, likely coming close to matching Q4’s less-than-stellar 1.2% pace.”

The surplus surprise came primarily thanks to an increase in exports, and a smaller rise in imports in the month. High tech equipment and autos led the way. “Combined with a sturdy snapback in wholesale trade of 1.7%, reported today, this suggests that GDP growth was quite solid in March after the small dip in February. Just as it now appears that first quarter U.S. GDP will be revised lower from the initial 2% estimate, Canada’s first quarter growth is headed for 2%, or better,” says BMO Nesbitt Burns.

CIBC World Markets notes that the surplus is coming mostly from sliding imports, rather than strong exports. Although this month it wasn’t all about the U.S. “For once, the improvement in Canada’s trade balance was not dependent on a larger surplus with the U.S. A smaller deficit with the European Union and the swing to a positive balance with Japan — the first in more than two years — was the story in March.”

The big question is what it all this means for interest rates. “This definitely falls into the good news camp for Canada and the currency, but it will likely be overlooked in the near-term by markets until global growth resumes,” say RBC DS analysts. “Today’s figures, however, will not go unnoticed by the Bank of Canada. Following an expected 50 bps cut on May 29, the end of the easing cycle is at hand.”

“There’s now only next week’s retail sales report standing in the way of the Bank of Canada’s rate decision on May 29. Sturdy employment figures and hotter-than-expected inflation have bred talk of a cautious 25 bps cut, but we still view a more aggressive 50 bps move as the percentage call,” say CIBC economists.

BMO Nesbitt Burns is hedging its bets. “This is yet another strong trade surplus number, made that much better by the rebound in exports and imports. Besides supporting the Canadian dollar, it will also keep the debate churning on the Bank of Canada’s next move.”
-IE Staff