UPDATE 2-Export renewal cuts Canada's May trade gap to near zero

Thu Jul 3, 2014 11:12am EDT

(Adds analysts' comments on implications for growth and the Bank of Canada)

By Randall Palmer

OTTAWA, July 3 (Reuters) - A resurgence in Canadian exports after they were hampered by plant maintenance helped cut the country's trade gap to C$152 million ($143 million) in May from C$961 million in April, despite record imports, Statistics Canada said on Thursday.

Exports rose by 3.5 percent to the second highest level ever at a seasonally adjusted C$44.17 billion, exceeded only in July 2008, with volumes up 4.2 percent. Analysts, however, were divided on the impact of the trade upturn on Canada's still-tepid economic growth.

"Unfortunately, that rebound was heavily influenced by certain one-off factors and is therefore unlikely to convince the Bank of Canada that its long-awaited export revival is at hand," said David Madani, Canada economist at Capital Economics.

Bank of Montreal senior economist Benjamin Reitzes offered a brighter view: "While trade may not add much to growth in (the second quarter), the improving trend in exports bodes well for the rest of 2014."

Imports rose at 1.6 percent, less than half the pace of export growth, but at C$44.32 billion they nonetheless topped April's record C$43.62 billion.

The trade balance ran four months of deficit from October 2013, then returned to surplus in February and March before tipping back into deficit in April, largely because maintenance slowed production at refineries and car plants.

Exports of vehicles and parts rose 9.8 percent to C$6.62 billion in May, while exports of refined oil products bounced back by C$505 million to C$1.12 billion after having dropped by C$452 million in April. Exports to the United States were the second highest on record.

Higher imports were also led by vehicles and parts, which rose by 6.7 percent to C$7.80 billion, whereas imports of energy products dropped 3.6 percent. Imports from countries other than the United States increased 5.1 percent to a record C$15.61 billion.

TD Securities senior Canada macro strategist Mazen Issa said net exports had been expected to provide somewhat of a net drag on growth but now might have only a negligible effect.

"Though this is just one print, this may be the beginnings of the rotation in the drivers of growth that has long been sought," he said, alluding to the central bank's hope that exports and business investment would take over from indebted consumers and government in leading the economy.

Second quarter growth is still likely to come in softer than the 2.5 percent annualized rate the Bank of Canada forecast in its April Monetary Policy Report, and bank Governor Stephen Poloz will still likely emphasize this in trying to talk down a recent acceleration in inflation, Issa said.

($1=$1.06 Canadian) (Editing by Chizu Nomiyama; and Peter Galloway)