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Canada posted its second straight trade surplus in June, but slumping imports and a reversal of recent export gains have raised questions about the country’s trade momentum in a protectionist environment.

Statistics Canada reported a merchandise trade surplus of $136-million in June, down from a revised $566-million in May. It marked the first time since the end of 2016 that the country posted consecutive surpluses.

Economists had predicted a return to a small deficit, in the $300-million range, anticipating that exports would give back some ground after surging 4.6 per cent in May, a jump that was aided by one-time factors. And exports did indeed decline by 5.1 per cent in June, more than reversing May’s gains, although much of the reversal stemmed from lower prices; export volumes, excluding price changes, fell a more modest 2.2 per cent.

The surprise surplus was mostly due to a 4.3-per-cent slump in imports, which fell to their lowest level in seven months – evidence of weaker demand in the domestic economy. On a volume basis, imports were down 3.6 per cent.

Total two-way trade (exports plus imports) was down 4.6 per cent from May, at $100.5-billion, a four-month low. And Statscan noted that the declines on both sides of the ledger were broadly based: 10 of 11 export sectors lost ground, while nine of 11 import sectors fell.

“It was a bit of a two-faced report,” said Royce Mendes, senior economist at Canadian Imperial Bank of Commerce. “The surplus was only the result of a drop in two-way trade. That was not positive for the Canadian economy.”

The slowdown comes as global trade flows in general have been deteriorating, with the U.S.-China trade war elevating uncertainty and weighing on global demand. The dispute between the world’s two biggest trading nations sharply escalated in mid-May, when the U.S. increased tariffs on US$200-billion of Chinese goods to 25 per cent from 10 per cent, a move that was met with retaliatory tariffs by China at the beginning of June.

The U.S. merchandise trade report for June, also released Friday, bore the scars of the escalation: Exports declined 2.7 per cent and imports fell 2.1 per cent in the first full month under the tariff increases.

Meanwhile, evidence is mounting that the trade hostilities are weighing increasingly on the world economy. Thursday’s Markit global manufacturing purchasing managers’ index (PMI) – considered a key indicator of industrial activity and global demand – came in at 49.3 for July, its lowest since 2012, amid a deepening decline in new export orders. (Any reading below 50 implies an outright contraction in global manufacturing.)

“That’s quite worrying for the future of export growth," said Stephen Brown, senior Canada economist for Capital Economics, an independent economic research firm.

Despite June’s trade downturn, the month capped a generally strong quarter for Canadian exporters, with shipments up 5.1 per cent in value and 4.1 per cent in volume in the March-to-June period. With imports having dipped overall in the quarter, net trade will be a major contributor to second-quarter economic growth, which Statscan will report at the end of this month.

Coupled with the solid May gross domestic product report earlier this week (real GDP grew a more-than-expected 0.2 per cent from April), economists now estimate that real GDP rose at about a 3-per-cent annualized rate in the quarter, a strong rebound after growth all but stalled in the prior two quarters.

However, the slowdown in both exports and imports to end the quarter, coupled with growing global growth concerns, raise questions about the momentum of trade entering the second half of the year.

“It certainly tells us we shouldn’t expect a repeat of the second quarter,” said Toronto-Dominion Bank senior economist Brian DePratto. “I think we’re looking at more modest growth, both in trade and the overall economy.”

And with U.S. President Donald Trump threatening Thursday to further expand U.S. tariffs against China, there’s now a serious risk that the global trade malaise will deepen in the coming months.

“What concerns us are the new tariff threats,” Mr. Brown said, adding that they have the potential to affect a broader cross-section of the economy than the tariffs to date.

“The trade risk is more significant.”

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