April 5, 2016 / 12:37 PM / in 2 years

UPDATE 2-Canada trade deficit jumps, exports drop after good start to 2016

(Releads with analyst comments, details of release)

By David Ljunggren

OTTAWA, April 5 (Reuters) - Canada’s trade deficit unexpectedly jumped in February as exports dropped by the most in almost seven years, reflecting the volatility still hampering an economy hit by low oil prices.

Statistics Canada said on Tuesday the deficit hit C$1.91 billion ($1.45 billion), up from a C$628 million shortfall in January. Market operators polled by Reuters had forecast a deficit of C$900 million.

Exports dropped by 5.4 percent, the largest monthly decline since May 2009, on lower shipments of consumer goods, energy products and motor vehicles and parts.

The news disappointed analysts who had been encouraged by strong exports in December and January and healthy growth in January.

“Perhaps some pay back is to be expected after a dazzling start to the year for the Canadian economy,” said BMO Capital Markets economist Robert Kavcic in a note to clients.

February marked the 18th consecutive monthly trade deficit, reflecting the turmoil caused by low oil prices. Export prices dropped by 3.2 percent while volumes declined by 2.2 percent.

Canada will take more than two years to adjust fully to the drop in oil prices, a senior central bank official said last week, signaling no quick end to the shock.

“The air is going out of the balloon to an extent after the supposed optimism that we saw in January,” said David Watt, chief economist at HSBC Bank Canada.

“This just again highlights the vulnerability of the Canadian economy right now. We don’t have a lot of domestic demand and if foreign demand wavers even an iota we’re going to have a challenge.”

Imports decreased by 2.6 percent, pulled down by lower oil imports. Overall, import prices slipped by 1.4 percent while volumes shrank by 1.2 percent.

Exports to the United States, which accounted for 75.9 percent of Canada’s global total in February, fell by 5.6 percent while imports dropped by 2.7 percent. As a result, Canada’s trade surplus with the United States slipped to C$2.68 billion from C$3.80 billion in January.

Export Development Canada chief economist Peter Hall said the Canadian dollar had appreciated by 4.4 percent over the month against the U.S. greenback, wreaking havoc with pricing.

“After two spectacular months this is a bit of a pull back,” he said. “We’re not looking at this and saying ‘All is lost’ ... the fundamentals are still very strong in the United States.”

($1=$1.32 Canadian)

Editing by Chizu Nomiyama and Meredith Mazzilli

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