Canada Records Unexpected Trade Deficit in February

Introduction

Canada has moved into a trade deficit for February, reversing a previous surplus, despite record-level exports and imports as businesses stockpile inventory in anticipation of U.S. tariffs.

Context

According to Statistics Canada, the trade deficit for February stood at C$1.52 billion, down from a 32-month high surplus of C$3.13 billion in January. Analysts had predicted a surplus of C$3.55 billion for the month.

Developments

Since November, Canada's merchandise trade has gained momentum, partly due to looming tariff threats from the U.S. President, who has already imposed tariffs on various imports from Canada. Nevertheless, no reciprocal tariffs were introduced recently.

These tariff threats have prompted U.S. businesses to ramp up inventory levels, reflecting on Canada's trade statistics. As a result, Canada's surplus with the U.S. rose for three consecutive months, reaching a record in January.

Despite a 5.5% drop in total exports to C$70.11 billion in February, this figure remains the second highest since May 2022. A decline was observed in 10 of the 11 product sections, but the losses did not completely offset gains from earlier months. Notably, energy product exports saw a significant decline of 6.3%, marking the first decrease since September 2024 due to falling crude oil prices.

Exports of motor vehicles and their parts also fell by 8.8% in February, yet these remained at their highest levels in a year, aside from January, according to the statistics agency.

Stuart Bergman, chief economist with Export Development Canada, noted that the decline in exports negated January's gains, indicating a slowdown in the previously observed front-loading effect. He mentioned that while stockpiling persisted in February, export volatility was expected to continue, with front-loading effects diminishing further in April.

Imports experienced an uptick for the fifth consecutive month, rising by 0.88% to C$71.63 billion. Exports to the U.S. decreased by 3.6% but still accounted for almost 80% of Canada’s total exports in February. Imports from the U.S. increased by 2.5%, representing 63% of total imports.

The Canadian dollar strengthened by 1.03% to 1.4084 against the U.S. dollar following the release of the trade data.

Conclusion

Canada's trade scenario in February illustrates a significant shift as it navigates trade deficits alongside substantial global economic dynamics. Analysts will closely watch future developments, especially in relation to tariffs and inventory management strategies.