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Canada’s trade gap narrowed dramatically in June, to its smallest in 17 months, as the country’s exports surged to record levels even as protectionist trade clouds gathered.

Statistics Canada reported Friday that the merchandise trade deficit shrank to $626-million, from a revised $2.7-billion in May. Exports jumped 4.1 per cent, their biggest one-month increase since November, 2016, to a record $50.7-billion, while imports dipped 0.2 per cent.

On a volume basis, exports were up 2.1 per cent while imports were down 1.2 per cent.

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The June deficit was a happy surprise for economists, who had expected that the trade gap would remain above $2-billion, where it has been for much of the past year. The improvement also comes despite rising trade hostilities with the United States, by far Canada’s biggest trading partner, which imposed tariffs of 25 per cent on Canadian steel and 10 per cent on aluminum at the beginning of June, while threatening to bring in levies against Canadian autos and parts.

“There’s no debating this is a solid report,” said Bank of Montreal senior economist Benjamin Reitzes in a note to clients.

Exports to the United States were up 2.5 per cent month over month, lifting Canada’s merchandise trade surplus with its neighbour to $4.1-billion from $3.3 billion. A weaker Canadian dollar in the month was a contributing factor.

But exports to non-U.S. markets fared even better, surging 8.7 per cent in the month. Canada’s non-U.S. trade deficit shrank to $4.7-billion from $6.1-billion.

Statscan said that exports increased in eight of 11 industry sectors. Imports, despite their overall small decline, were up in seven of 11 sectors.

“We thought steel and aluminum tariffs would be the story of this morning’s trade report, but strong export growth in most other sectors swamped the impact of those new duties,” said Royal Bank of Canada senior economist Josh Nye in a research report.

Statscan noted that exports to the U.S. of Canadian steel products subject to the new tariffs plunged 37 per cent in June, after having surged 40 per cent over the prior three months. Exports of aluminum subject to the tariffs fell 7 per cent, after jumping 29 per cent in the prior three months.

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On the other hand, it said shipments to the U.S. of autos – on which the U.S. launched a formal investigation in June to consider tariffs – were the biggest contributor to June’s growth in exports to the U.S. market. Exports of passenger cars and light trucks were up 5 per cent in the month.

National Bank of Canada economist Kyle Dahms suggested that U.S. tariff threats may be temporarily fuelling U.S. demand for some Canadian goods.

“Trade relations with the U.S. could be causing importers down south to stock up,” he said in a research note.

Economists also noted that the return of several Canadian refineries in June from shutdowns in April and May was a significant factor in both the export and import figures, as Canada had more energy products available for export and had less demand for energy imports to make up for the lost domestic production. Energy exports were up 7.1 per cent month over month, while energy imports were down 15.1 per cent.

June capped off a strong second quarter for Canadian trade. Exports surged 6 per cent, the biggest quarter-to-quarter increase in a decade, outpacing an impressive 3.2-per-cent rise in imports. On a volume basis, exports were up 3.8 per cent while imports rose 1.7 per cent.

Those figures imply that net trade was a major contributor to what now looks like a very solid quarter of growth for the Canadian economy.

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“After acting as a drag on the economy for the preceding three quarters, external trade appears to have provided a decent boost to GDP growth in the second quarter,” said Stephen Brown, senior Canada economist for Capital Economics.

Indeed, in light of June’s trade figures, economists are nudging up their already optimistic expectations for second-quarter real GDP growth. Bank of Montreal formally raised its estimate to 3.3 per cent – a half percentage point higher than the Bank of Canada’s most recent projection.

The rising growth expectations and strong export performance strengthen the case for another Bank of Canada interest-rate hike, on top of last month’s quarter-percentage-point increase. But most still think the central bank will wait until October, to give itself more time to gauge the impact of trade uncertainty, and will hold rates steady in its next rate announcement in early September. Statscan will publish second-quarter GDP numbers less than a week before the Bank of Canada’s September rate decision.

“The nearly month-long burst of strength in the Canadian data brings some additional intrigue to the outlook for Bank of Canada policy, but there’s still a long way until the next meeting in September,” Bank of Montreal’s Mr. Reitzes said.

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