Canada’s annual trade surplus with the rest of the world fell to its lowest level in three years in 2002, as merchandise exports for the year as a whole declined and imports rose. The automotive sector was behind the swing.

Statistics Canada reported Thursday that Canada’s international trade surplus fell to $4.1 billion, which was more or less in line with consensus expectations. Exports dropped by 0.3% and imports rose by 0.5%.

“The ongoing woes of the U.S. economy have dealt a blow to Canada’s export sector over the past few months, and December’s tally was certainly no exception,” comments TD Bank. “Canada’s merchandise exports recorded a 0.3% decline in December, on the heels of November’s precipitous 1.8% slide, and exports to the U.S. appeared even softer, with a 0.5% drop during the month. But perhaps more revealing is the fact that export volumes recorded a fifth consecutive monthly slide of 0.6% in December — and a seventh in the past eight months — leaving little doubt that the weak U.S. economic landscape has indeed been spilling over to Canada1s trade performance.”

TD forecasts that merchandise trade alone is likely to have shaved between one-half and one full percentage point off the annualized pace of GDP growth in the final quarter of 2002 — confirming its view that the Canadian economy is on tap for a lacklustre gain of 2%-2.5% in the October-December period.

BMO Nesbitt Burns says that for the year as a whole, the trade surplus narrowed to $54.6 billion, still healthy, but the smallest in three years. Exports fell 1.0% in 2002. Shipments to the U.S. were off 0.7%, and down 4.9% to the struggling European Union. Meanwhile, solid domestic demand led to a 1.6% increase in imports last year, with healthy gains from all regions except the U.S. “Despite the thinner surplus, Canada’s trade balance remains very healthy,” concludes Nesbitt.

CIBC World Markets calls trade was “an ugly negative for the Canadian economy in the fourth quarter”, with real goods exports tumbling at a 9.1% annualized pace. “A sluggish U.S. economy is finally making its mark on Canada, as the American slowdown moves from technology-centred to hit one of Canada1s key sectors, autos. Dealers cleared out a lot of vehicles in December, but the outlook is for softer sales again through Q1– not good news for our exports. Moreover, a rising Canadian dollar threatens Canada1s competitive edge in other sectors.”

TD says that Canada’s exports and its trade balance is likely to receive a big boost from rising commodity prices in January. “Not only did crude oil and natural gas prices continue to climb during the month, but prices for several other of Canada’s basic commodity exports also moved higher. Overall, however, Canada’s trade performance is unlikely to blow off the roof in 2003. While the U.S. economy does appear to be firming up from its anemic fourth-quarter pace, auto shipments are likely to remain a notable soft spot in 2003, and in any event, the U.S. economy is on track for a couple more quarters of sub-par growth.”

CIBC says that the numbers, “… underscores our view that the Bank of Canada is overly worried about the potential for the economy to heat up again without the continued support of very low interest rates.”