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Canada’s merchandise trade deficit swelled to a record $4.1-billion in March, as solid exports were outpaced by even stronger growth in imports – evidence of improving economic momentum despite the widening trade gap, economists said.

Statistics Canada reported that imports surged 6 per cent month over month, to a record $51.7-billion, driven by strong gains in autos and consumer goods. That outweighed growth in exports, which rose 3.7 per cent to $47.6-billion, their biggest gain in four months and their second-highest level on record.

On a volume basis, which excludes the impact of price and currency changes, imports rose 5.3 per cent while exports were up 3 per cent.

“The trade deficit deteriorated in dollar value terms, but for solid underlying reasons that reflect strength in the domestic economy alongside external strength,” Bank of Nova Scotia economist Derek Holt said in a research note.

“While the import boom is by itself a headwind to GDP, the associated implications for domestic demand suggest that the economy maintained healthy momentum in March,” Canadian Imperial Bank of Commerce economist Royce Mendes said.

Economists had anticipated a modest decline in the trade deficit from February’s $2.9-billion (revised from an originally reported $2.7-billion), thanks to the easing of severe rail-car shortages that had choked off grain exports earlier in the year. But they hadn’t foreseen the widespread strength in imports. Nine of 11 import sectors posted gains.

Exports also showed broad strength, with nine of 11 sectors rising.

The import side showed encouraging consumer demand, with passenger vehicles and light trucks up 13 per cent month over month, and consumer products up nearly 8 per cent. Economists said the strength reflects Canada’s continued strong labour market, as well as the acceleration in wage growth in recent months.

Meanwhile, gains in imports of computer equipment (up 13 per cent), medium and heavy vehicles (up 9 per cent), and industrial machinery and equipment (up 3 per cent) suggested a solid pickup in business investment. That’s an area the Bank of Canada has been watching closely for signs of improvement, as it speaks to the economy’s capacity to grow.

“The underlying details point to solid momentum across investment, materials demand and consumption,” Mr. Holt said.

Exports were lifted by the rebound in the agricultural sector, up nearly 15 per cent, reversing February’s 14-per-cent slump, as the sector bounced back from its temporary transportation problems. Exports of aircraft and other transportation equipment jumped 24 per cent, largely reflecting shipments under Canada’s contract to supply armoured vehicles to Saudi Arabia.

Statscan said that for the first quarter as a whole, import volumes rose 1.5 per cent, while export volumes inched up 0.3 per cent. The difference means that net trade likely subtracted about one percentage point from Canada’s annualized rate of gross domestic product growth in the quarter, economists said – the third straight quarter trade has been a drag on growth. Economists estimate that first-quarter real GDP growth was about in line with the fourth quarter’s relatively tame pace of 1.7 per cent, annualized.

Nevertheless, they said the positive implications of the growth in two-way trade suggest better times ahead for trade and the Canadian economy.

“Things were looking very good to end off the first quarter and transition to the second quarter,” Mr. Holt said. He added that the improvements in exports, which have been a sore spot for the Canadian economy since the middle of last year, “suggest that a soft patch across earlier months may be giving way to a better picture.”

One key factor that has been holding back export growth has been the deep uncertainty surrounding the North American free-trade agreement (NAFTA) talks. But even without a NAFTA deal nailed down, Canadian exporters may be starting to make up for lost time amid a healthy and growing U.S. economy, which is by far Canada’s biggest export market.

“Although a NAFTA agreement is looking closer to becoming reality, an agreement in principle is likely still weeks away. Nevertheless, we anticipate that improved momentum, stronger demand from the U.S., and a sub-80-U.S.-cent loonie should encourage a rebound in Canadian exports in the second quarter,” said Fotios Raptis, senior economist at Toronto-Dominion Bank, in a research report.