By Ismail Shakil and Steve Scherer

OTTAWA (Reuters) – Canada recorded a surprise trade deficit in May, a sign economic growth may be slowing, as energy and grains dragged down exports and unwrought precious metals and motor vehicles contributed to a surge in imports.

The country’s trade deficit with the world was C$3.44 billion ($2.59 billion), the largest since October 2020, after a downwardly revised C$894 million surplus in April, Statistics Canada data showed on Thursday.

Analysts had forecast a surplus of C$1.15 billion.

“Net trade has been a positive for growth in recent quarters, but today’s data suggests that may be coming to a rather abrupt end,” said Andrew Grantham, senior economist at CIBC Capital Markets, in a note.

Total imports increased 3% in May, capping three consecutive months of decline, helped by metal and non-metallic mineral products – largely unwrought gold, silver, and platinum group metals and their alloys.

Motor vehicles and parts imports also contributed to the gain, rising 4.5% in May to reach a record-high C$11.3 billion. Higher imports of engines and parts reflected better supply chain conditions for Canadian automakers in 2023, Statscan said.

By volume, imports rose 3.5%.

Total exports decreased 3.8% during the same period, largely due to cheaper energy products as well as wheat and canola. By volume, exports declined 2.5%.

“The data is pretty sobering,” said Stuart Bergman, chief economist at Export Development Canada, the country’s export credit agency. “It shows a trend towards slower, below-trend growth here in Canada.”

Demand for Canadian grains has slowed in recent months amid improving global supplies, especially for wheat and canola, Statscan said. This led to lower prices, providing an incentive for Canadian producers to wait for better market conditions.

After a five-month pause, the Bank of Canada this month raised rates to a 22-year high of 4.75%, saying monetary policy was not sufficiently restrictive for a hot economy.

Most analysts and money markets expect another 25 basis point hike either next week or in September.

The central bank said it will look to economic reports like May trade and June unemployment, which is due out Friday, to determine whether more rate increases are needed.

($1 = 1.3277 Canadian dollars)

(Reporting by Ismail Shakil and Dale Smith in Ottawa; Editing by Devika Syamnath and Alexander Smith)

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