Canada's Trade Deficit Narrows in March to C$135 Million -- Update

Canada's trade deficit narrowed markedly in March, bolstered by a significant gain in exports of energy and food products to Asia.

Exports rebounded in March, posting their strongest performance in four months and retracing all of February's decline. The report's details likely offer some comfort to policy makers that a long-awaited shift in the Canadian economy's growth profile -- toward exports and business investment and away from household consumption -- is slowly unfolding.

Canada recorded a merchandise trade deficit with the rest of the world in March of 135 million Canadian dollars ($98.4 million), Statistics Canada said Thursday. Market expectations were for a larger C$1 billion trade deficit, according to economists at Royal Bank of Canada.

The previous month's figures were also revised, and suggest a wider trade deficit for Canada in February of C$1.08 billion versus the earlier estimate of C$972 million.

In March, exports advanced 3.8% to C$46.98 billion, a record level, as eight of 11 sectors tracked recorded month-over-month gains. Meanwhile, imports rose 1.7% to C$47.11 billion, on higher prices.

In volume, or price-adjusted, terms, exports climbed 2.5% and imports fell 0.2%.

Meanwhile, U.S. trade figures were also released Thursday, and indicated the U.S. trade deficit narrowed in March to $43.71 billion, as exports and imports fell, 0.9% and 0.7%, respectively.

Canada is the U.S.'s second-largest trading partner, with two-way trade in 2016 totaling C$752.2 billion, according to the data agency. Furthermore, roughly three-quarters of all Canadian exports -- accounting for about 20% of Canada's economic output -- are U.S.-bound.

The March report indicated Canadian exports to the U.S. were largely unchanged from the previous month, up a meager 0.1% to C$34.35 billion. In contrast, exports to non-U.S. countries climbed 15.3% in March to a record C$12.63 billion.

Energy exports rose 7% to C$8.75 billion. Part of this gain was attributed to higher coal exports to Japan, China and South Korea, coinciding with a slowdown in coal production in Australia caused by a cyclone. Energy took over the title of Canada's biggest export in December from motor vehicle and parts, regaining the top spot after commodity prices rebounded.

Jimmy Jean, economist at Desjardins Capital Markets, said it was a "pretty strong" report, notwithstanding what appears a temporary gain in coal sales abroad, and should allay concerns after February's lackluster results.

"We are seeing some improvement, and this validates the Bank of Canada's decision to embrace a more optimistic take on the outlook," said Mr. Jean, adding the central bank will remain prudent amid developments on trade policy in Washington.

Excluding energy exports, Canadian exports rose 3.1%. Some of this strength came from exports of consumer goods, which rose 6.8% to C$6.12 billion. The data agency said sales abroad of so-called other food products led the increase, in particular shipments of yellow peas and red lentils to India.

Offsetting that gain was a 1.8% drop in the auto-related exports, to C$7.72 billion. Auto exports have hit a soft spot after they climbed 9.5% in all of 2016.

The improved trade picture after a disappointing February report emerges as protectionist rhetoric from Washington escalated in recent weeks. Last week, President Donald Trump said he was considering issuing a formal withdrawal from North American Free Trade Agreement but opted to engage in renegotiations after speaking with Canadian Prime Minister Justin Trudeau and Mexico's President Enrique Peña Nieto. The U.S. also imposed last week a new 20% tariff on imports of Canadian lumber, alleging the Canadian government was subsidizing its domestic producers.

The Bank of Canada has singled out policy uncertainty in Washington as a reason to remain cautious, warning that U.S. trade policy represents a threat to growth that outweighs a recent pickup in the Canadian economy.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

May 04, 2017 09:15 ET (13:15 GMT)