September 2, 2016 / 1:37 PM / a year ago

Canada July trade deficit shrinks as non-energy sector shines

3 Min Read

OTTAWA, Sept 2 (Reuters) - Canada's trade deficit in July unexpectedly shrank on stronger non-energy exports, a sector the Bank of Canada says is crucial to helping revive an economy hit by low oil prices.

Statistics Canada said on Friday that the July deficit was C$2.49 billion ($1.90 billion), lower than the C$3.25 billion shortfall predicted by analysts in a Reuters poll and below the record C$3.97 billion in June.

Exports jumped by 3.4 percent, the biggest month-on-month gain since last December, on healthy gains in the motor vehicles and parts, metal and non-metallic mineral products and transportation equipment sectors. Volumes rose by 3.7 percent while prices fell by 0.3 percent.

Non-energy exports have been spluttering for several months, prompting concern at the Bank of Canada, which cut interest rates twice last year to offset the effects of the oil slump. The central bank has long been looking for non-resource exports, helped by the soft currency and improving U.S. demand, to offset the commodity price drag.

"The most important thing here is that exports finally snapped their lengthy slump in a meaningful way," said Doug Porter, chief economist at BMO Capital Markets.

"This is definitely a breath of fresh air for Canadian trade."

The Canadian dollar strengthened on the data, rising to C$1.3019 to the U.S. dollar, or 76.81 U.S. cents, up from C$1.3091, or 76.39 U.S. cents before the release.

The Bank of Canada has a rate announcement scheduled for Wednesday. A Reuters poll showed markets see the central bank on hold until 2018.

Imports slipped by 0.1 percent on lower demand for consumer goods, vehicles and parts and electronic and electrical equipment and parts.

Exports to the United States, which took 76.2 percent of all Canadian exports in July, rose by 3.3 percent while imports fell by 0.5 percent. As a result, Canada's trade surplus with the United States rose to C$2.62 billion from C$1.43 billion in June.

"Domestic demand in the United States is still strong ... and that's translating into growth for Canadian exports," said Ross Prusakowski, a senior economist at Export Development Canada.

In additional to low oil prices, the economy also has to recover from a major fire in northern Alberta in May.

Statscan, citing the after-effects of the inferno, said separately that the labor productivity of Canadian businesses in the second quarter of 2016 fell by 0.3 percent, the first drop in a year.

$1=$1.31 Canadian Additional reporting by Fergal Smith in Toronto; Editing by Meredith Mazzilli

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