The collapse in oil prices crippled Canada's balance of trade in January, but the annual growth of non-energy shipments coupled with green shoots on business investment signal that the elusive export-led recovery is still in progress.
Canada's trade deficit widened to its highest level in 2 1/2 years as monthly exports fell 2.8 per cent to $42.6-billion, with both prices and volumes declining. Imports were little changed, coming in at $45.1-billion.
The merchandise trade deficit swelled to $2.45-billion, far worse than the consensus estimate for a $1-billion deficit and the nation's second largest on record.
The poor numbers, coupled with stronger-than-expected payroll growth in the United States, sent the Canadian dollar falling nearly a full cent to $0.793 (U.S.).
Tumbling crude prices, which hit their lowest level since 2009 in January, were the biggest contributor to this larger-than-anticipated deficit. Energy exports dropped for the eighth consecutive month, down nearly 15 per cent.
Shipments of metal and non-metallic mineral products also fell, by 8 per cent.
A 3.1-per-cent pickup in exports of automobiles and auto parts slightly offset these decreases.
Exports to the United States fell 3.1 per cent, shrinking the nation's trade surplus with its largest trading partner to
December's deficit, originally reported as $649-million, was revised downward to $1.2-billion.
In 2014, net exports made their largest contribution to annual real gross domestic product growth since 1999, but ended the year on a soft note and have stumbled out of the gate in 2015.
The Bank of Canada has long been hoping for a rebalancing of growth, away from consumer spending and toward exports and business investment, as highly indebted Canadian households will be hard-pressed to continue driving the economy's expansion. As the central bank believes that lower oil prices will cause the most economic pain early in the year, this lone report is unlikely to significantly influence its view of the economy.
There were some positive numbers in the report. Excluding crude oil and bitumen, exports managed to advance 0.2 per cent from December. In addition, the rise in imported industrial and electronic equipment bodes well for business investment.
"Real non-energy exports, while they were down on the month, were still up about 10 per cent year-over-year, their best showing since August, 2010," said Bank of Montreal senior economist Benjamin Reitzes.
Economists remain hopeful that a resurgent American economy and softer loonie will buoy export growth in the year ahead.
"The fundamentals are there for export growth: Foreign demand is in a good place, and the dollar's in a good place," Toronto-Dominion Bank economist Brian DePratto said.
The Canadian balance of trade has been subject to what economists call the J-curve effect. As a currency weakens, there is a tendency for the trade balance to get worse, as imports become more expensive and the pickup in export growth lags the depreciation in the Canadian dollar.
"On the J-curve, we're probably further back – still on the left part – than we would expect to be at this point in time," Mr. DePratto said.
"Stripping out energy, it looks like we're close to the improving phase, since the dollar has been weak for quite some time and we should see a substitution effect on the import side," Mr. Reitzes said.
The weakness seen in exports since July is primarily attributable to price fluctuations – in particular, crumbling energy prices – rather than the actual volume of shipments, which is what matters for real GDP.