The high dollar and the global slowdown are crushing Canada's trade-dependent economy.
The latest evidence: The country posted the largest trade deficit in July since Statistics Canada began keeping records in 1971.
It wasn't just the scale of the gap – $2.3-billion – that jolted analysts. It's how the economy got there.
Virtually all major exports fell sharply, including energy, autos, agriculture, forest products and machinery-and-equipment. The overall drop was 3.4 per cent, paced by an even larger 5 per cent decline in exports to the U.S. – Canada's largest customer.
"This is about as bad as it gets for Canadian exporters," Scotiabank economist Derek Holt said.
And in spite of the strong dollar, which has risen even higher since July, Canadian shoppers and businesses are consuming and importing less. Imports fell 2.2 per cent in July.
"This report flashed broad-based weakness," Bank of Montreal deputy chief economist Douglas Porter said in a research note.
"The rapidly widening deficit is a loud warning shot that the currency is already overvalued and an increasing challenge for the economy."
He estimates that trade will subtract a full percentage-point off already weak GDP growth in the third quarter.
The high dollar allows Canadian businesses to buy foreign-made equipment. But with the global economy slowing, businesses are leery of investing. And heavily indebted consumers are increasingly tapped out.
At $2.3-billion, the trade deficit narrowly eclipsed the old mark, set in September 2010.
Scotiabank's Mr. Holt said the high dollar is most damaging to U.S.-bound exports, which accounted for 72 per cent of all exports in July.
"The pattern by country would suggest the difficulties are related to exporting into the U.S., which is Canada's dominant trading partner and where currency effects are most pronounced," he said.
Canadian exporters are being hit by the powerful combination of the high dollar, which has surged above par with the U.S. dollar in recent days, and generally lower commodity prices.
The largest contributor to the drop in exports was energy, which fell 8.5 per cent, in part due to production disruptions.