Australia's trade deficit is narrowing thanks to a growing volume of iron ore exports, but is likely to stay in the red as the price of the country's biggest export falls.
International trade figures for July defied economists' gloomy expectations, as the deficit fell for a second straight month.
Imports outweighed exports by $1.359 billion in July, an improvement on June's deficit of $1.564 billion.
Economists had expected a deficit of $1.75 billion in July.
A one per cent rise in exports drove the better-than-expected result, RBC Capital Markets fixed income strategist Michael Turner said.
But while the trade balance was improving from a horror $2 billion deficit in May, it is unlikely to be back in the black in the near future, he said.
"Consistent with ongoing growth in supply and some stabilisation in prices, iron ore exports bounced 3.6 per cent, which was the only movement of note on the month on the export side," Mr Turner said.
"Whilst starting the September quarter on a better note than the June quarter, the ongoing slide in spot commodity prices, particularly iron ore, suggests that trade balances are unlikely to shift back to surplus in the near term."
JP Morgan economist Tom Kennedy said the export figures were encouraging given the persistent weakness in the iron ore price, which fell to a five-year low of $US85.70 per tonne overnight.
But falling prices for key commodities are taking a toll on the trade balance, meaning it will remain firmly in the red for some time yet, he said.
AMP Capital chief economist Shane Oliver said the fall in the iron ore price remained a big drag, but would be partly offset by rising export volumes from completed mines.
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