The trade report from Statistics Canada found the deficit shrinking by almost half from a downwardly revised $1.5 billion in August, aided by a welcome 1.9 per cent uptick in exports.
Analysts said the performance was encouraging given the weakness in export markets, particularly the U.S. and Europe. Economists had expected another $1.5 billion deficit.
But they noted that on the back of soft August and July numbers, the third-quarter tally will still weigh heavily on the economy.
"September's trade report confirms that exports were a major drag on overall third-quarter gross domestic product growth, with net exports subtracting possibly as much as three percentage points," said David Madani of Capital Economics.
Exports were down about eight per cent over the three months of the third quarter, which ended in September.
"Unfortunately, an export rebound this quarter looks unlikely," he added, despite early signs of a recovery in the U.S. housing sector.
The Bank of Canada surprised many earlier in the month by predicting that the third quarter — the July-September period — would see growth fall to one per cent, a view most economists now have come to build into their assumptions. The actual result won't be known until the end of this month.
TD Bank economist Diana Petramala said she expects a more sustained exports rebound to begin about the middle of next year, assuming that risks surrounding European government finances and the U.S. fiscal crisis abate.
With the Canadian housing market increasingly looking like it is tapped out and consumers at record debt levels, policy-makers say exports will need to rebound for the Canadian economy to return to strong economic growth.
Overall for September, merchandise exports rose to 1.9 per cent to $38 billion, led by energy products.
The big winners included the aircraft industry, up 17.9 per cent), agriculture (14.4), metal ores (17.4) and machinery (2.6).
Energy products were up 4.2 per cent, but mostly due to stronger prices, suggesting the temporary production shutdowns of the summer had not fully played out in September.
Meanwhile, imports held steady at $38.8 billion, with higher volumes offsetting lower prices.
Exports to the United States grew 1.3 per cent to $27.8 billion on higher exports of aircraft and other transportation equipment and parts, while imports from America edged up 0.5 per cent to $24.3 billion.
The trade surplus with the United States rose to $3.5 billion in September from $3.2 billion in August.
Exports to countries other than the United States increased 3.6 per cent to $10.2 billion, while imports slipped 0.8 per cent to $14.5 billion, meaning the trade deficit with those countries narrowed to $4.3 billion in September from $4.8 billion in August.Suggest a correction