* Trade deficit nearly triples to A$1.556 bln in July
* Gap much worse than expected, could drag on growth
* China demand, however, continues to underpins exports
* August service sector employment improves
* New vehicle sales slip at slower pace in August
By Anirban Nag
SYDNEY, Sept 3 (Reuters) - Australia's trade deficit widened to its most in 14 months in July as imports outpaced softer exports, while the employment situation in the services sector became less bleak in August, adding to evidence of a recovery.
The Australian dollar
Imports grew 4 percent in July, the fastest pace since October 2008, mainly due to a 21 percent jump in petroleum products. Capital goods imports also rose a healthy 5 percent, boding well for the economy which grew at its fastest pace in over a year in the second quarter.
"That (capital good imports) of course is important for the investment outlook, which looks a little brighter following the second-quarter business investment survey last week that showed managers are feeling more optimistic," said Helen Kevans, economist at JP Morgan.
Data on Wednesday showed the Australian economy grew at 0.6 percent in the June quarter, the highest of any developed nation, as generous fiscal and monetary stimulus drove a revival in consumer and business spending.
The robust second-quarter growth numbers led investors to
bet the Reserve Bank of Australia (RBA) will start raising
interest rates as early as November.
Earlier this week, the RBA kept rates at a record low of 3.0 percent after its monthly policy meeting and surprised some by saying such a stimulatory policy was justified for now given lingering uncertainties at home and abroad.
The country's terms of trade -- what it gets for exports compared to what it pays for imports -- have fallen over 15 percent so far this year, dealing a blow to profits, wages and tax receipts.
"However, we continue to be surprised by the resilience of resource export volumes while a solid rise in imports may well be flagging the improved domestic demand growth in the second quarter," said Scott Haslem, Chief economist at UBS.
"We look for the RBA to move away from the current 3 percent cash rate setting to 4 percent by the first quarter next year, with the RBA likely to start with a 25 basis point hike before Christmas, most likely November."
OUTPERFORMER
Australia is out-performing most of the rest of the developed world, thanks in large part to a stable banking system and China's insatiable demand for resources.
The trade data on Thursday showed demand for commodities from China continued to underpin exports. Volumes were relatively resilient, with exports of metal ores and minerals up 5 percent in July. But that was overshadowed by a 27 percent drop in volatile non-monetary gold and a fall in rural good shipments.
Economists believe trade could be a modest drag on growth, just like it was in the second quarter, as huge price cuts for coal and iron ore feed through.
But private sector data added to signs of a rebound.
Activity in Australia's service sector contracted at a slower pace in August and a measure of employment improved to its highest level in 14 months.
The Australian Industry Group (AiG)-Commonwealth Bank Performance of Services Index (PSI) rose 3.9 points to 48.0 in August. Firms took on more workers in recreational and restaurant sectors, the first increase this year.
Other data showed the annual pace of decline in motor vehicle sales almost halved in August.
Figures from The Australian Federal Chamber of Automotive Industries showed sales were 5.2 percent below August last year, an improvement from July when they were down 10.2 percent.
"These figures indicate that private buyers are regaining confidence and re-entering the market," Chief Executive of the Federal Chamber of Automotive Industries, Andrew McKellar said. (Editing by Kim Coghill)