September 3, 2015 / 12:40 PM / in 2 years

UPDATE 2-Healthy export growth helps cut Canada's trade deficit in July

(Adds analyst quotes, market reaction, background)

OTTAWA, Sept 3 (Reuters) - Canada’s export sector posted healthy growth for the second month in a row in July, helping cut the country’s trade deficit to an eight-month low and adding to expectations the central bank will hold rates steady when it meets next week.

The trade deficit narrowed to C$593 million ($446 million), data from Statistics Canada showed on Thursday, much less than the C$1.30 billion deficit that economists had forecast. It was the smallest since a C$381 million deficit recorded in November 2014.

Exports grew by 2.3 percent from June to C$45.46 billion, the second highest figure on record, on shipments of motor vehicles, consumer goods and aircraft. Exports of energy products dropped by 5.7 percent, largely due to lower prices.

Economists were also encouraged by an increase in export volumes, which could add to third-quarter growth, if sustained.

“There’s no two ways about it, this is a solid report,” Benjamin Reitzes, senior economist at BMO Capital Markets, wrote in a research note.

Data last week confirmed that Canada was in a mild recession in the first half of the year as the oil-exporting country has been hurt by a slide in crude prices. But a pickup in growth in June underscored expectations the economy will fare better in the latter half of the year.

Reitzes said the strong export volume figures, as well as June’s better-than-expected growth reading, puts more confidence in BMO Capital’s forecast for 2.8 percent growth in the third quarter.

The data will be studied by the Bank of Canada, which cited disappointing non-energy exports as one reason it cut interest rates in July, for a second time this year.

Economists said the figures reinforced their expectations that the bank will leave interest rates at 0.5 percent when it announces its decision on Sept. 9, and traders trimmed their expectations of another cut.

Markets are now pricing in a 19 percent chance that rates will be lowered to 0.25 percent. The report helped the Canadian dollar firm against the greenback.

Imports increased by 1.7 percent to a record C$46.05 billion on higher shipments of energy products, aircraft and other transportation equipment as well as electronic and electrical equipment.

Exports to the United States, which accounted for 76.4 percent of Canada’s global total in July, rose by 2.1 percent, while imports grew 4.3 percent. As a result, Canada’s trade surplus with the United States dropped to C$3.79 billion from C$4.36 billion in June. ($1=$1.33 Canadian) (Reporting by David Ljunggren and Leah Schnurr; Editing by Jeffrey Benkoe)

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