Canada's balance of international payments, fourth quarter 2020
Fourth quarter 2020
Canada's current account deficit (on a seasonal adjusted basis) narrowed by $3.2 billion in the fourth quarter to $7.3 billion. This reduction reflected a higher investment income surplus and—to a lesser extent—a lower trade in goods and services deficit.
Investment income receipts were up in the fourth quarter after three consecutive quarterly reductions, while payments were down for the fourth quarter in a row. At the same time, the trade in goods deficit edged down but remained high historically, while the trade in services balance continued to record an unusual surplus position.
In the financial account (unadjusted for seasonal variation), inflows of funds from abroad to finance the current account deficit came primarily from transactions in currency and deposits. Overall, foreign holdings of these instruments in Canada increased considerably over the quarter.
Meanwhile, portfolio and direct investment activity both generated a net outflow of funds from the economy. Strong Canadian acquisitions of foreign shares combined with weak foreign direct investment activity in Canada relative to Canadian direct investment abroad contributed to the net outflow of funds in the quarter.
Overall for 2020, the COVID-19 pandemic and all related measures put in place to curb its spread and support Canadian businesses and households had a major impact on balance of payments flows, both in the current and financial accounts.
Goods and services deficit declines, while investment income surplus increases
The deficit in trade in goods and services dropped $421 million to $9.2 billion in the fourth quarter, driven by a lower trade in goods deficit and a higher trade in services surplus.
Exports of goods were up $3.5 billion to $140.3 billion, mostly on higher trade in metal and non-metallic mineral products, and in energy products. After rebounding in the third quarter, exports of motor vehicles and parts were down $2.3 billion. Imports of goods advanced $3.2 billion to $149.8 billion, led by increases in imports of consumer goods and motor vehicles and parts.
On a geographical basis, the exports and imports of goods with the United States were down in the fourth quarter. In contrast, exports to countries other than the United States increased by $4.5 billion, with the largest gain occurring with the United Kingdom, while imports rose $4.6 billion mostly on higher trade with China.
The services surplus edged up $116 million to $285 million and remained in a surplus position for a third straight quarter. The commercial services surplus increased by $660 million on higher exports of financial services and of personal, cultural and recreational services. The latter category includes tuition fees paid by international students taking online training from their home countries.
The increase in the investment income surplus was the main contributor to the lowest current account deficit in the quarter. The surplus rose $3.0 billion to $4.2 billion, almost entirely as a result of higher profits earned by Canadian direct investors abroad, as direct investment profits earned by foreigners in Canada edged up slightly.
Direct investment in Canada at its lowest level in nine years
Direct investment abroad reached $21.3 billion in the fourth quarter, a level comparable to that observed in the previous quarter. The investment was largely in the form of equity instruments in foreign affiliates and was mainly directed to the United States. Mergers and acquisitions activity increased to $6.4 billion, up from a low of $2.3 billion in the third quarter.
Direct investment in Canada amounted to $2.5 billion in the fourth quarter—the lowest level in nine years. Cross-border mergers and acquisitions remained low at $1.9 billion. As a result, direct investment generated a net outflow of funds from the economy of $18.8 billion in the fourth quarter.
Record Canadian purchases of foreign securities
Canadian investors acquired an unprecedented $42.5 billion of foreign securities in the fourth quarter. This activity was led by record purchases of foreign—predominantly US—shares, totalling $35.4 billion. US stocks prices, as measured by the S&P500 composite index, increased 11.7% in the quarter. At the same time, Canadian investors acquired $7.1 billion of foreign debt securities, mainly corporate instruments.
Foreign investment in Canadian securities was $23.8 billion in the fourth quarter, up from $11.8 billion in the third quarter. Investors purchased a similar amount of debt and equity securities in the quarter.
Foreign acquisitions of government debt instruments reached $20.8 billion, following acquisitions totalling $77.5 billion in the first three quarters of the year. Retirements of corporate bonds denominated in foreign currency moderated the overall investment activity. Meanwhile, foreign investors added $12.0 billion of Canadian shares to their holdings—the largest investment since the first quarter of 2019. Canadian stock prices increased 8.1% over the quarter.
Reduction of the current account deficit in 2020
The current account deficit dropped $4.7 billion to $42.7 billion in 2020. The investment income account was the major contributor to this decline—its balance moving from a $2.2 billion deficit in 2019 to a $10.1 billion surplus in 2020. This change was offset in part by a higher trade in goods and services deficit.
Both investment income receipts and payments were down considerably in 2020. Total payments dropped $31.9 billion (-21.3%), as profits earned by foreign direct investors in Canada decreased substantially. Lower payments of interest on Canadian debt securities also contributed to this decline, despite much higher foreign holdings attributable to a decline in borrowing rates and the fact that the Canadian dollar appreciated against the US dollar. Receipts decreased $19.7 billion (-13.3%) largely on lower profits earned on Canadian direct investment abroad.
Exports of goods and services were down $98.7 billion to $638.8 billion in 2020, while imports of goods and services dropped $91.3 billion to $683.1 billion. As a result, the trade in goods and services deficit reached $44.3 billion in 2020 compared with $36.9 billion in 2019.
Led by a significant reduction in exports of energy products and of motor vehicles and parts, the trade in goods deficit increased to a record $36.7 billion in 2020. Although most of the decline in exports occurred in the second quarter, exports of goods had not yet reached their pre-pandemic levels by the end of the year.
The trade in services balance posted its lowest deficit in 14 years, as imports declined by more than exports. Travel restrictions significantly dampened travel services and the transport of passengers—two components that usually post large deficits in the Canadian balance of payments.
Strong foreign investment in Canadian securities in 2020
In the financial account, transactions in securities generated a significant net inflow of funds in 2020. Overall, foreign investors acquired $127.1 billion of Canadian securities. Foreign purchases in the form of securities issued by the federal government increased substantially to support Canadian businesses and households affected by the pandemic, particularly in the first half of the year.
On the other side of the ledger, Canadian investment in foreign securities totalled $40.0 billion in 2020, up from $33.0 billion in 2019. Investment activity on foreign markets picked up strongly following a record divestment of $45.1 billion in the first quarter, when the global pandemic intensified and major stock markets posted substantial losses.
Direct investment activity slowed considerably in 2020. Direct investment in Canada amounted to $34.5 billion, down from $59.9 billion in 2019 and well below the record of $126.1 billion observed in 2007. Direct investment abroad reached $67.8 billion in 2020—its lowest level in seven years.
Note to readers
Because of COVID-19-related travel restrictions and border closures, atypical values for non-education-related travel services and the passenger fares component of transportation services were reported for most of 2020.
To publish coherent estimates of seasonally adjusted values, seasonal factors from 2019 were applied to the unadjusted data for 2020. Although using 2019 factors allowed for a certain amount of coherence and consistency in the seasonally adjusted estimates, it resulted in a larger-than-usual discrepancy between the annual seasonally adjusted and unadjusted series that must be reconciled at the end of the year, as is common practice.
As a result, significant revisions to the seasonally adjusted data were introduced with this release, in particular to exports for the first quarter of the year. These revisions have created a significant decrease in exports from the fourth quarter of 2019 to the first quarter of 2020. Data for 2019 will be open for revisions in fall 2021, and seasonal adjustment models may be reviewed at that time.
If this had been a more normal year, under more normal seasonal patterns, this decline would not have been as large. Users should exercise caution when analyzing quarter-over-quarter movements for seasonally adjusted exports for those two series—especially during this period—and may wish to augment their analysis with unadjusted data.
The balance of international payments covers all economic transactions between Canadian residents and non-residents in three accounts: the current account, the capital account and the financial account.
The current account covers transactions in goods, services, compensation of employees, investment income and secondary income (current transfers).
The current account data in this release are seasonally adjusted. For information on seasonal adjustment, see Seasonally adjusted data – Frequently asked questions.
The capital account covers capital transfers and transactions in non-produced, non-financial assets.
The financial account covers transactions in financial assets and liabilities.
In principle, a net lending (+) / net borrowing (-) derived from the sum of the current and capital accounts corresponds to a net lending (+) / net borrowing (-) derived from the financial account. In practice, as data are compiled from multiple sources, this is rarely the case and gives rise to measurement error. The discrepancy (net errors and omissions) is the unobserved net inflow or outflow.
Foreign direct investment is presented on an asset-liability principle basis (that is, gross basis) in the financial account. Foreign direct investment can also be presented on a directional principle basis (that is, net basis), as shown in supplementary foreign direct investment tables 36-10-0025-01, 36-10-0026-01, and 36-10-0473-01. The difference between the two foreign direct investment conceptual presentations resides in the classification of reverse investment such as (1) Canadian affiliates' claims on foreign parents and (2) Canadian parents' liabilities to foreign affiliates. Under the asset/liability presentation, (1) is classified as an asset and included in direct investment assets, also referred to as direct investment abroad in this text, and (2) is classified as a liability and included in direct investment liability, also referred to as direct investment in Canada in this text.
For more information on the balance of payments, consult chapter 8, "International accounts," in the User Guide: Canadian System of Macroeconomic Accounts, available on our website. The chapter also presents the most recent balance of payments statistics.
Real-time table 36-10-0042-01 will be updated on March 8. For more information, see Real-time tables.
Balance of international payments data for the first quarter of 2021 will be released on May 31, 2021.
The product Methodology for Exports of Energy Products within the International Merchandise Trade Program, which is part of Latest Developments in the Canadian Economic Accounts (13-605-X), is now available.
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