Canada’s merchandise trade surplus narrowed slightly in October, more or less as expected, but still worrying to economists.

“The results were a mild relief considering yesterday’s dismal manufacturing data and the fact that energy prices tumbled in the month,” says BMO Nesbitt Burns.

The surplus fell slightly to $4.2 billion from a downwardly revised $4.3 billion in September. Exports slipped 1%, and imports fell another 0.6%.

“Exports would have been down even more but for a 49% jump in aircraft, bumped up by international demand and delivery delays from September. Thus, while the surplus held up better than expected in the wake of the border disruptions following September 11 and considering the sharp fall-off in U.S. activity, it is poised to narrow further in the months ahead,” notes BMO.

“With a growing number of sectors failing to recover from September’s economic trauma, Canada’s fourth quarter growth outlook is turning quite bleak,” says CIBC World Markets. “On a year-over-year basis, exports are now underwater in the five largest trade categories (comprising more than 80% of headline exports), as a U.S. recession and overseas economic weakness have soured markets for most Canadian goods.”

Wholesale trade also suffered a sizeable setback for the second straight month. Wholesale shipments were down 0.9% in October, and are now up less than 1% over the past 12 months. “With merchandise and wholesale trade failing to stage much of a recovery in October, Q4 growth has gotten off to a poor start,” says CIBC. “While the retail results for October are sure to be better, October GDP looks to regain only a fraction of the massive 0.8% loss racked up in September. All told, we continue to look for a second consecutive output decline in the final quarter of 2001.”

BMO says the trade numbers are no worse than expected, but don’t offer a lot of positive news for the economy either. CIBC concludes that “The underlying signs of economic weakness are surely not lost on the Bank of Canada. With the economy failing to mount a significant recovery in October, further rate cutting will be needed come January 15. Of course, the December employment report (due out only days before the next rate date) will weigh most heavily on Governor Dodge’s decision to go with 25 or 50 bps.”