- Trade surplus beats expectations at $1.1 billion in March.

- Q1 real goods exports down 19.3%, real goods imports by 24.1%.

Canada's merchandise trade surplus beat expectations in March, rising to $1.1 billion from an upwardly revised $262 million in February. Unfortunately, the larger surplus was due not to a resurgence of export strength but to a larger fall in imports. The value of imports fell 4.4%, while exports edged down 1.8%. The story was not much different on the volume side - imports declined 4.5% and exports by 1.8%. The biggest mover in the month was energy imports, which fell 18.4%, to its lowest level since October 2004. While much of the past decline in energy products has been a price story, this was not the case in March. Instead, the volume of energy imports declined 16.2%, while prices fell 2.7%. On the export side, the decline was fairly wide spread. Machinery and equipment exports led the way at -3.4%, followed by automotive products at -3.3%.

From an international perspective, the trade surplus with the U.S. remained relatively steady at $3.6 billion, while a rise in exports to the European Union (particularly Great Britain), pushed the trade balance into a very slight surplus position. Nonetheless, the small improvement in the trade balance is small comfort when considering the absolute depth of the fall in trade in the last several months. In nominal terms, Canadian exports have fallen by 28.7% from their peak late last year, while imports have dropped 20.3%. The fall in real terms is almost as astounding, with export volumes down 19.3% and imports by 24.1%. While improvements in commodity prices will aid the trade surplus going forward, an upwardly mobile Canadian dollar will prevent any significant improvement in demand.

With so much of the Canadian economy dependent on trade, the March trade data paints a bleak picture of the state of the Canadian economy at the outset of the year. The decline in imports, particularly of machinery and equipment (-42.6% annualized in Q1), points to a steep fall in capital and inventory investment in the quarter. In addition, the decline in commodity prices continued to weigh on Canadian income in the first quarter and with export prices down close to 27%, real income in Canada will see another steep drop. Combined with data on retail trade and housing, these data augur for a fall in real domestic demand that will rank among the steepest on record. While nascent signs of life are starting to emerge in the U.S., it could be several more quarters before we see a return to positive growth in the Canadian economy.