Canadian economic data came in on the weak side Friday, spurring more talk of possible cuts to Canadian interest rates.

Canada’s trade surplus with the rest of the world fell for the fourth time in six months in April, Statistics Canada reported. It was the largest decline in merchandise exports in more than two years and was almost entirely due to energy. Merchandise exports tumbled 4.5% to $33.7 billion, while imports fell 1.3% to $29.6 billion

Canadian companies shipped exports worth $33.7 billion, down 4.5% from March, the largest monthly decline since February 2001. Meanwhile, imports fell 1.3% to a 12-month low of $29.6 billion.

As a result, Canada’s trade surplus with the rest of the world fell from $5.3 billion in March to $4.1 billion in April, the lowest level since December 2002. The $1.2 billion decline in the trade surplus was the largest since June 2002.

BMO Nesbitt Burns says that the steep pullback in energy prices during the month accounted for much of the decline, as energy exports plunged 18.6%.

However, ex-energy exports were also down 1.2%, with particular weakness in autos and other consumer products. Exports have again suddenly slipped below year-ago levels, with the declines concentrated in sales to the U.S. and Europe, Nesbitt observes. Imports also declined 1.3% in April.

“The surge in the Canadian dollar is likely putting downward pressure on the value of imports, by pushing down import prices,” says Nesbitt. “However, over time, the loonie’s jump will pump up import volumes. While the volume of imports did decline 0.8% in April, they are still up 5.3% from year-ago levels. In contrast, the volume of exports has declined 4.6% y/y, acting as a pronounced drag on GDP growth.”

In a separate release, StatsCan reported that following a strong first quarter, all major manufacturing indicators took a hit in April.

Widespread decreases in manufacturing activity contributed to a 3.4% decline in shipments to $43 billion. Inventories continued to edge up, while manufacturers reported an eighth consecutive decline in unfilled orders.

As a result, the inventory-to-shipment ratio, a barometer measuring manufacturers’ abilities to clear their inventories, hit 1.49 in April from 1.43 in March, the highest level since December 2001.

“Canadian manufacturing activity was expected to be ugly in April, but not this ugly,” says Nesbitt, observing widespread weakness in the factory sector. “There is little reason for optimism in the near-term outlook as unfilled orders were down 1.9%, the third straight decline, new orders sank by 4.5%, and the inventory-to-sales ratio leapt to 1.49 from the prior 1.43. On top of this, there is the strength of the Canadian dollar to contend with, which is weighing on exports.”

“There are no two ways about it — this morning’s dual Canadian economic reports were not a pretty sight, and have certainly sent the second quarter off to a very weak start,” says TD Bank. It suggests that the export sector will once again, be a considerable drag on economic growth in the second quarter of the year. And, that there is a noticeable inventory overhang brewing in the manufacturing sector which is likely to limit growth in manufacturing production in the months ahead.

“All told, this morning’s dual data releases confirm that the combination of sluggish U.S. demand and an appreciating currency has dealt a thrashing to Canada’s export sector — and the heavily export-oriented manufacturing industries are feeling more than their share of the pain,” TD finds. “This can only add to the odds that the Canadian economy will record very little, if any growth at all in the second quarter. Moreover, the fortunes of Canada’s export sector are unlikely to show much improvement in the months ahead — there is still no compelling evidence of an acceleration in U.S. demand, and the bite from the sharp appreciation of the currency is only starting to be felt.”

“Today’s merchandise trade and manufacturing shipments data were in all aspects weaker than expected,” confirms CIBC World Markets. “The steady erosion in real exports is of particular concern, as it has robbed Canada of a traditionally vital source of growth. After having dragged growth lower in each of the past two quarters, April’s further decline in the real goods balance is a poor start to Q2. Moreover, the substantial weakness in factory shipments will make GDP growth a lot harder to come by in April, when the economy was already struggling to cope with SARS-related fallout.”