Sept. 10 (Bloomberg) -- Canada reported an unexpected trade deficit in July as a recovering economy bolstered demand for imported energy products, cars and machinery.

The deficit was C$1.43 billion ($1.32 billion), compared with a revised C$37 million surplus in June, Statistics Canada said today. Imports climbed for the first time in five months, rising 8.3 percent to C$31.7 billion, even as prices fell.

“The surge in imports is a very strong confirmation that domestic demand is indeed turning the corner,” said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto.

The Bank of Canada said today that growth in the second half of this year could be stronger than it predicted in July, when it projected the economy would grow at a 1.3 percent annualized pace this quarter and 3 percent in the fourth quarter, ending a recession that began at the end of last year.

The central bank also said in July that international trade will contribute 0.4 percentage points to growth this year, after net exports cut 1.9 percentage points from growth in 2008.

Economists expected a C$100 million trade surplus in July, based on the median of 20 responses compiled by Bloomberg. The agency revised its June data from the originally reported C$55 million deficit.

“Usually a deterioration in the balance is negative news because of negative implications on growth,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. “The deterioration coming from a huge jump in imports might be suggesting a reviving domestic activity, which is a good sign.”

Production Recovery

Ferley pointed to the 19 percent surge in imports of automotive products and said it could indicate Canadian manufacturers are preparing to boost production. An 11 percent gain in imports of machinery and equipment also shows companies are ramping up output, Ferley said.

The dollar traded at C$1.0805 per U.S. dollar at 11:21 a.m. in Toronto. The currency had fallen to as weak as C$1.0880 per U.S. dollar before the report, after closing late yesterday at C$1.0785.

Total exports rose 3.3 percent in July, the second gain in five months, to C$30.3 billion, driven by higher volumes, the statistics agency said. Export prices, like import prices, fell. The increase was led by an 11 percent jump in sales of both machinery and equipment and automotive products. Exports of energy products fell 3.2 percent.

U.S. Trade

The increase in imports was led by a 19 percent surge in energy products purchased abroad.

Canada’s trade surplus with the U.S., its largest trade partner, narrowed to C$1.94 billion from C$3.23 billion in June. Canada’s imports from its southern neighbor gained 9.9 percent while exports to the U.S. rose 2.5 percent. Since July 2008, exports to the U.S. have fallen by 35 percent, while imports have declined 20 percent.

In the U.S., the gap between imports and exports increased 16 percent, the most in more than a decade, to $32 billion from a revised $27.5 billion in June, the Commerce Department said today in Washington. Imports soared 4.7 percent, outpacing a 2.2 percent gain in exports.

To contact the reporters on this story: Alexandre Deslongchamps in Ottawa at adeslongcham@bloomberg.net.

Last Updated: September 10, 2009 11:26 EDT