Weakness in the automotive sector cut Canadian exports and imports of goods in January, Statistics Canada said this morning.

The merchandise trade surplus dipped slightly to $5.2 billion from $5.4 billion in December.

Exports totalled $31.8 billion, down 4.7% from December. Imports dropped to $26.6 billion, down 5%.

StatsCan noted that exports have declined in 7 of the last 10 months, and the 4.7% drop from December was the largest in nine months.

The agency said there were widespread decreases in both exports and imports with all of Canada’s principal trading areas in January, “a total reversal from December.”

The January surplus with the United States, Canada’s main trading partner, was $7.3 billion, down from $7.6 billion a month earlier. Exports fell 4% to $26 billion and imports dropped 4.2% to $18.7 billion.

Canada’s total trade deficit with countries other than the United States remained unchanged at $2.1 billion.

“After export values weakened throughout 2003, the first month of 2004 did little to improve the international trade outlook for Canadians, as exports values declined for every major commodity sector except energy products,” said StatsCan.

Automotive exports, showing much volatility throughout the second half of 2003, have declined more than 10% in three of the last four months, as manufacturing plants and dealerships faced consumer uncertainty in the market.

January’s widespread weakness was led by an 11.4% drop in passenger cars, Canada’s largest automotive category. Trucks and motor vehicle parts declines were less severe, but more than offset December’s growth.

Today’s trade number hide a much uglier trade picture, economists say. They predict more cuts to interest rates cut are likely, as a result.

“This report is a classic case of the headline result disguising the bigger story,” says BMO Nesbitt Burns.

“There is no sense in beating around the bush — today’s merchandise trade report was quite simply dreadful,” offers TD Bank.

“Any beauty in Canada’s January trade surplus was only skin deep, as what was inside looked downright ugly,” chimes in CIBC World Markets.

Nesbitt says that the big shocker was that both exports and imports tumbled in the month, “the declines were across the board, with hefty drops in exports and imports of machinery & equipment.”

CIBC notes that the broad import drop signals weak domestic demand.

TD says “it is painfully obvious that Canada’s export sector is not yet out of the woods, still bogged down heavily by the impact of the stronger loonie. In fact, given today’s data, the unexpected rise in exports in the final quarter of 2004 already looks like a distant blip. And, although the outcome is still up in the air, this data does add to the odds that the Bank of Canada will cut rates again in April.”

“The weakness in two-way trade fits like a glove with our view that the Bank of Canada has more work to do in giving the economy some offsetting interest rate relief. Look for a quarter point rate cut in April, and another cut much later in the year, as growth falls short of the central bank’s forecast,” concludes Nesbitt.