April 4, 2017 / 12:48 PM / in 7 months

UPDATE 2-Canada swings to unexpected trade deficit in Feb as exports fall

(Adds details, background, economist comment, market reaction)

OTTAWA, April 4 (Reuters) - Canada swung to an unexpected trade deficit in February as exports tumbled by the most in nearly a year, suggesting economic momentum may have hit a speed bump and giving the Bank of Canada room to maintain its cautious stance next week.

Following three consecutive months of surpluses, Canada posted a trade gap of C$972 million ($724 million), Statistics Canada said on Tuesday, short of economists’ expectations for a surplus of C$500 million. January was revised down to a surplus of C$421 million from the initially reported C$807 million.

The value of exports fell 2.4 percent, the biggest decrease since March 2016, with declines widespread. Excluding energy products, exports were down 2.4 percent.

The Canadian dollar extended declines against the greenback following the data.

Recent encouraging data had bolstered expectations first-quarter growth could top the central bank’s forecast of 2.5 percent. Economists said growth was still set to beat that.

Nick Exarhos, economist at CIBC Capital Markets, said he was still expecting growth of about 3.5 percent in the first quarter, though the trade numbers could weigh on growth in February.

The Bank of Canada has downplayed the recent better-than-expected data and Governor Stephen Poloz said last week the economy has a lot more room to grow.

While the central bank will have to acknowledge some of the economic outperformance when it meets next week, it will likely continue to focus on the excess capacity in the economy and downside risks to the outlook, said Exarhos.

“The Bank of Canada has highlighted we’ve been here before, where things have looked good at the start of the year if only to melt away in the second half,” Exarhos said. “They’ve noted they’re not going to make policy decisions on a short stretch of data.”

The bank is expected to hold interest rates at 0.50 percent.

Exports in the farm, fishing and food products sector slumped 10.6 percent, with canola contributing the most to the decline. Exports of aircraft and transportation equipment and parts fell 15.2 percent, led by a drop in aircraft shipments.

Exports to the United States, Canada’s biggest trading partner, declined 1.2 percent with decreases across categories, the statistics agency said. Exports to countries other than the United States fell 5.9 percent, including lower exports to China, mainly due to the decrease in canola.

($1=$1.3433 Canadian)

Reporting by Leah Schnurr; Editing by W Simon and Meredith Mazzilli

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