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Canada’s merchandise trade deficit grew to $2.7-billion in February, as both imports and exports bounced back from a weak January.

Statistics Canada reported that the value of Canada’s exports grew 0.4 per cent on a seasonally adjusted basis, helped by a strong rebound in the auto sector but held back by rail transportation issues that hurt agricultural shipments. The export growth was outpaced by even stronger demand for imports, up 1.9 per cent, in a broad-based recovery from their January slump.

With import growth outpacing exports, the net result was a widening of the trade deficit from January’s $1.9-billion.

On a volume basis, imports rose 1.9 per cent in the month, while exports grew 0.6 per cent.

But despite the pick-up in demand in both the domestic and export markets, economists said the widening trade deficit is another sign that Canada’s economy had a sluggish first quarter of the year.

“On balance, imports are roughly flat so far this year relative to [the 2017 fourth] quarter, while exports have declined sharply. That points to net trade once again acting as a drag on GDP growth in the first quarter of 2018,” said Royal Bank of Canada economist Josh Nye in a research report.

Exports of motor vehicles and parts jumped 5 per cent month over month, as auto plants came back up to speed after temporary shutdowns in January. The resumption of production also fuelled a rebound in imports of engines and other auto parts, which rose 5.7 per cent.

But exports were held back by a plunge in farm and fishing products, down 21 per cent, reflecting acute rail-car shortages in western Canada that gutted grain shipments. Wheat exports tumbled 42 per cent month over month, while canola exports were down 40 per cent. Last month, the federal transport and agriculture ministers jointly sent a letter to the country’s two major rail companies, Canadian National Railway Co. and Canadian Pacific Railway Ltd., demanding that they provide a plan to address the backlog, saying that “Canada’s international reputation as a reliable supplier is at stake.”

On the import side, eight of 11 sectors showed growth in the month, led by energy products, which surged 15 per cent to their highest level in more than three years. Statscan said a major contributor was a surge of gasoline shipments into British Columbia.

“The first quarter is still weak from the standpoint of trade’s contributions to GDP growth, but we’ll need more data to move beyond unusual distortions to the figures so far this year in order to more clearly assess what is going on with trade,” said Bank of Nova Scotia economist Derek Holt in a research note.

Canada’s trade surplus with the United States, its biggest trading partner, narrowed to $2.6-billion in February from $2.9-billion in January. The decline came as the Canadian dollar hit a six-month high against its U.S. counterpart at the start of the month. The currency has since retreated by more than 3 US cents, a decline that should lend some support to Canadian exporters.

Economists noted that auto exports should also show further recovery in the March data, as manufacturing plants continued to return to full speed.

Nevertheless, trade remains a major source of worry for the Canadian economy. Not only have exports struggled to sustain traction despite healthy growth in the U.S. and global economies, but uncertainty surrounding the NAFTA negotiations and the growing U.S.-China trade conflict is weighing on the trade outlook.

“Export volumes have made no progress for much of the past three years, with an even worse performance if you exclude energy or commodities,” said Bank of Montreal economist Benjamin Reitzes in a research note.

Economists said the weakness and uncertainty in trade strengthens the case for the Bank of Canada to move slowly on interest-rate increases this year, despite evidence from the labour market and elsewhere that the Canadian economy is running near full capacity and that inflation pressures have begun to build. In light of the still relatively tepid trade numbers in February, some economists now believe that first-quarter real gross domestic product may have grown by only about 1.5 per cent annualized – a full percentage point below the Bank of Canada’s forecast in January in its most recent quarterly projections.

“With first-quarter growth now poised to come in even softer, there’s yet another reason for the Bank of Canada to remain patient, consistent with our call for the next rate hike to come in July,” Mr. Reitzes said.

“The persistent lack of economic rotation toward the export sector does … highlight the importance of maintaining a weak loonie, something that will likely play a role in holding the Bank of Canada’s fire until later this year,” said Canadian Imperial Bank of Commerce economist Royce Mendes.