Sometimes a shrinking trade deficit is not a sign of a better economy.

Canada's merchandise trade deficit shrank unexpectedly in October , and is now nearing balance at $169-million, versus a revised deficit of $1-billion in September, Statistics Canada reported Tuesday.

It was Canada's smallest trade deficit in seven months. The gap peaked in July at $2.7-billion.

Most economists had expected the deficit to grow.

The catch is that the deficit was smaller in October largely because imports fell – down 1.2 per cent in dollar terms from a month earlier and 2.1 per cent in volumes.

Imports in seven of 11 categories tracked by Statscan posted declines in the month – a sign of "widespread economic weakness," according to Bank of Nova Scotia economist Derek Holt.

The export side of the equation was better. Exports rose $400-million or 1 per cent to $38.1-billion. Exports of agricultural products (up $400-million) and energy (up $200-million) led the way. The gain in energy exports was largely to due to higher prices for oil products.

Agricultural exports reached a record monthly high of $2.2-billion. But Export Development Canada said it a commentary that the "stunning" jump is unlikely to continue in the months ahead.

"Export growth remains weak, with the drop in imports providing all the boost," Bank of Montreal economist Sal Guatieri concluded in a research note. "With the U.S. facing uncertainty driven by the 'fiscal cliff,' Canadians exports will likely remain challenged into next year."

Toronto-Dominion Bank economist Diana Petramala pointed out that exports have fallen nearly 10 per cent since last December.

"The global economic soft patch has dealt the Canadian export sector a heavy blow through 2012," she said.

She also blamed the looming 'fiscal cliff' in the U.S., which has sapped business and consumer confidence as Americans brace for tax hikes and government spending cuts.

But Ms. Petramala expressed some optimism for export growth in the latter half of next year as both the "U.S. recovery gathers steam and China's economy stabilizes."

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