Canada trade deficit widens, fueling bets on near-term rate cut

By Leah Schnurr OTTAWA (Reuters) - Canada's trade deficit widened to its second-largest on record in May as non-energy exports fell, fueling expectations the Bank of Canada could cut interest rates as early as next week to support an economy at risk of recession. The shortfall totaled C$3.34 billion ($2.63 billion), Statistics Canada said on Tuesday. It was the eighth consecutive month of deficits and exceeded the C$2.50 billion deficit economists had forecast. The data helped weaken the Canadian dollar to a three-month low while traders increased bets that the central bank will cut rates to 0.5 percent on July 15, pricing a 51 percent likelihood. The Bank of Canada shocked markets with a rate cut in January in response to tumbling oil prices. The bank had anticipated the oil shock would be front-loaded, meaning it hit the economy earlier and spread faster than anticipated. But a growing number of economists think the bank's growth forecast might be too optimistic. "This report caps a run of soft data over recent months and suggests that trade will not be nearly as positive as anticipated at the start of the year," said Benjamin Reitzes, senior economist at BMO Capital Markets. Canada's economy shrank in the first quarter. With growth also falling in April, there is a risk the second quarter will be negative, putting Canada into a recession for the first time since the 2008-09 financial crisis. Speaking in Vancouver, Finance Minister Joe Oliver said Canada is in a "fragile economic environment" and pointed to factors including oil prices and weak global growth. Still, he said it was critical to be fiscally responsible and that existing tax cuts and infrastructure spending this year should be supportive. Exports fell for the fifth consecutive month, declining by 0.6 percent, with volumes down 2.5 percent. Energy products exports rose 1.3 percent, but non-energy exports, which the Bank of Canada is hoping will help drive stronger economic growth, fell 1 percent. "Whether or not GDP will decline in the second quarter, or show modest growth, we're still up in the air. But this is one chip on the side of a potential negative for the second quarter," said Avery Shenfeld, chief economist at CIBC World Markets. Shenfeld is expecting a rate cut next week, though Friday's employment report could be a major influence on the bank's thinking, he said. The economy is forecast to have lost 10,000 jobs in June. (Additional reporting by Solarina Ho in Toronto; Editing by Alan Crosby and Chizu Nomiyama)