Canada’s trade surplus with the rest of the world bounced back to $4.9 billion in January, after falling for two consecutive months.

BMO Nesbitt Burns reports that exports rose 1.3%, breaking a two-month slide, despite soft activity in most of the world. “A 7.6% surge in energy shipments was the main source of export strength, but machinery and equipment exports also rose by a notable 4.6%.”

Imports fell 1.3% during the month, as automotive purchases slid. “Despite this, imports from the U.S. were up in January, offset by sharp declines in imports from Japan and the European Union. A 9% jump in energy imports prevented an even better reading on the trade balance,” notes Nesbitt.

“The growth in exports was entirely the result of a 27.2% surge in exports to the European Union, while exports to the U.S. were flat,” comments RBC. “In turn, the growth in exports was concentrated upon energy products and machinery and equipment exports. The causes of the drop in imports are also a source of concern in this morning’s numbers, since weakening imports of automotive products reflects weakening auto sector prospects that are particularly important to southern Ontario and Quebec, while a broad-based 1.8% drop in machinery and equipment imports – the largest import category — reflects renewed concerns over business investment trends since most M&E investment tends to get imported.”

“Trade was a clear drag on Q4 growth, with real exports plunging by an annualized 9% in the quarter,” says CIBC World Markets. “Although the situation has improved, it will take two more months of gains similar to that seen in January to prevent another quarterly decline in real export growth. While contributing nothing to the real GDP growth outlook, the recent spike in energy prices is a clear plus when it comes to Canada’s nominal trade balance. Further price-driven increases look to be on tap in coming reports. Holding the merchandise balance at January’s level for the remainder of Q1 would imply a $5 billion (annualized) increase over Q4’s average level, a clear plus for the current account.”

“This merchandise trade report was another impressive result for the Canadian economy, especially in the face of weakness elsewhere,” concludes Nesbitt.

RBC also notes that new house prices in Canada increased by 0.3% in January over December, and are up 5.1% over a year ago. And, Canada’s industrial capacity utilization rate slipped slightly in the fourth quarter of 2002. Expectations for an 83.4% utilization rate were slightly disappointed by an 82.9% reading. “Nonetheless, capacity constraints remain substantially greater than in the U.S. where the industrial capacity utilization rate stands at 75.7%,” says RBC. “On a broader basis, this is also true in terms of a comparison of overall output gaps – aggregate demand net of aggregate supply – which suggests that Canada is roughly in a state of balance, while the U.S. will remain in economy-wide excess supply conditions until at least the end of this year. This carries the implication that a more rapid pace of monetary tightening is expected in Canada to head off an earlier inflation threat north of the border.”