09/02/2016 09:58 EDT | Updated 09/03/2017 01:12 EDT

Trade deficit narrowed to $2.5B in July, offering sign of economic rebound

OTTAWA — Canadian exports picked up in July, raising hopes for a bounce back in the economy after it contracted in the second quarter.

Statistics Canada said Friday the country's trade deficit narrowed in July to $2.5 billion.

The result was better than the $3.25 billion that had been expected by economists, according to Thomson Reuters.

CIBC chief economist Avery Shenfeld said the improvement was a step in the right direction, but noted it was only one month in a quarter that is expected to be strong.

"We're getting big gains after a surprisingly and shockingly weak set of numbers for second-quarter exports," Shenfeld said.

"It still leaves the volume of activity for the export sectors disappointing compared to where we were at the beginning of the year, but it is a sign that things weren't as bad as they looked in the second quarter."

Earlier this week, Statistics Canada reported the economy contracted at an annual pace of 1.6 per cent in the second quarter due to weak exports and the Alberta forest fires in May.

However, the three-month period ended on a positive note as growth returned in June. The third quarter is expected to be strong as the oilsands operations closed due to the wildfires resume production and the rebuilding efforts get underway.

Bank of Montreal senior economist Benjamin Reitzes said after a "absolutely horrendous" second quarter, trade began on a far better footing in the third quarter.

"We'll need to see some follow-through over the next couple of months, but this should ease some concern about health of the export sector," Reitzes wrote in a note to clients.

"In addition, the narrower trade deficit is encouraging and, assuming we don't see another round of deterioration, suggests that the Canadian dollar may not need to weaken materially further to help balance the trade account."

Canadian exports increased 3.4 per cent to $42.7 billion in July, as volumes gained 3.7 per cent but prices fell 0.3 per cent. Nine of 11 sectors posted gains, boosted by non-energy exports. Excluding energy products, exports were up 4.1 per cent.

Imports dropped 0.1 per cent to $45.2 billion, as volumes fell 1.2 per cent and prices gained 1.1 per cent. The overall drop came despite growth in six of the 11 sectors tracked.

Shenfeld said what happens in the fourth quarter is going to be important.

"Canada's going to post a very good third-quarter growth rate not only because of the trade numbers but the recovery from the fire in Alberta, and the issue will be whether we then simply return to a mediocre pace in the fourth quarter," he said.

"The news now is less bad, but whether we are actually back on a true trend is something that we'll have to see on several months of data."

Exports to the United States increased 3.3 per cent to $32.5 billion while imports fell 0.5 per cent to $29.9 billion, to put Canada's trade surplus with its largest trading partner at $2.6 billion in July.

Exports to countries other than the U.S. rose 3.9 per cent to $10.2 billion in July, while imports were up 0.6 per cent to $15.3 billion in July.

Canada's trade deficit with countries other than the U.S. was $5.1 billion in July compared with $5.4 billion in June.