OTTAWA (Reuters) - Canada had its biggest trade deficit on record in July as both exports and imports fell in an unexpectedly dismal performance that raised doubts about the economy's resilience in the face of persistent weakness in the United States and Europe.
The deficit bulged to C$2.34 billion ($2.36 billion) from a revised C$1.93 deficit in June, according to Statistics Canada data released on Tuesday, surpassing by a hair the previous record deficit of C$2.33 billion in September 2010.
A sharp drop in crude oil shipments contributed to a 3.4 percent drop in overall exports. Imports fell 2.2 percent, dragged down by energy products as well as by machinery and equipment in a reversal of the strong business investment in those items in the previous month.
Analysts in a Reuters survey had forecast, on average, a deficit of C$1.40 billion.
"This is about as bad as it gets for Canadian exporters - at least so far," said Derek Holt, an economist at Scotia Capital.
Canada's trade surplus with its dominant trade partner, the United States, withered to its smallest level in nearly two years, which analysts attributed partly to the strong Canadian dollar which makes it more difficult for exporters to compete there.
U.S. imports from China soared to a record high in July, according to data on Tuesday that showed the U.S. trade deficit grew slightly. <ID: nL1E8KB39O>
The data throws a new twist into the Canadian economic story, which has so far been about a relatively robust domestic economy in face of turbulence elsewhere in the world.
The strength of the economy has spurred the Bank of Canada to make it clear over the past several months that its next move would be an interest rate hike, not a cut, although most analysts don't expect any action until the second quarter of next year.
"This further calls into question the appropriateness of a hawkish-sounding Bank of Canada," Holt wrote in a note to clients.
The bank could back out of its stance gracefully if demand for Canadian exports is weaker than expected, one of the downside risks it listed in its latest quarterly report in July. Its current projection is for exports to remain below their pre-recession peak until the beginning of 2014.
"While it comes as no surprise that the external sector continues to struggle this year, it is particularly concerning when domestic demand is exhibiting signs of fatigue," said Mazen Issa, a strategist at TD Securities
The July trade data suggests another quarter of tepid economic growth, analysts said. In real terms, exports were down 1.6 percent in the month and imports declined 1.7 percent.
Exports of crude petroleum tumbled 9.6 percent in July, hurt by a drop in both price and volume. Shipments of machinery and equipment and of automotive products fell by 5.5 percent and 5.3 percent, respectively.
Exports to the United States, by far Canada's biggest export market, slid 5 percent. Imports from the United States slipped 2.1 percent but were still the second highest on record after hitting a record high in June.
In the 12 months to July, total exports to the United States rose 1.3 percent while those to the European Union, which accounts for a much smaller amount of overall trade, fell 7.4 percent.
Reporting by Louise Egan and Alex Paterson; Editing by Leslie Adler; and Peter Galloway