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Analysis — First quarter 2009

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The balance on current account transactions with the rest of the world (on a seasonally adjusted basis) was a $9.1 billion deficit in the first quarter of 2009, larger than the $7.8 billion deficit in the previous quarter. This quarter current account deficit was led by a further decline of the goods surplus to $0.8 billion, which was partially offset by a lower deficit on investment income.

In the capital and financial account (unadjusted for seasonal variation), cross-border portfolio investment flows rebounded following the turmoil of the fourth quarter, adding significantly to large net inflows of funds to Canada in the first quarter. This mainly reflected non-resident investors adding to their portfolios with significant acquisitions of Canadian government debt instruments; Canadians had a slower pace of cross border investments but did return to foreign stock markets.

Note to readers

Annual and quarterly data have been revised for the reference years 2005 to 2008. This is in keeping with the general policy to revise national accounts statistics back four years at the time of the first quarter data release. In general, the revisions reflect more current sources of information coming from annual surveys and administrative data.

The balance of payments covers all economic transactions between Canadian residents and non-residents, in two accounts — the current account and the capital and financial account.

The current account covers transactions in goods, services, investment income and current transfers. Exports and interest income are examples of receipts, while imports and interest expense are payments. The overall balance of receipts and payments is Canada's current account surplus or deficit.

The capital and financial account is mainly composed of transactions in financial instruments. Financial assets and liabilities with non-residents are presented in three functional classes: direct investment, portfolio investment and all other types of investment. These flows arise from financial activities of either Canadian residents (foreign assets of Canadian investors) or non-residents (Canadian liabilities to foreign investors). Transactions resulting in capital inflows to Canada are presented as positive values while those giving rise to capital outflows from Canada are shown as negative values.

In principle, a current account surplus corresponds to an equivalent net outflow in the capital and financial account; and, a current account deficit corresponds to an equivalent net inflow in the capital and financial account. In other words, the two accounts should add to zero. In practice, as data are compiled from multiple sources, this is rarely the case and gives rise to measurement error. The statistical discrepancy is the unobserved net inflow or outflow.

Current account

Goods surplus continues to shrink

The goods surplus shrank to $0.8 billion in the first quarter of 2009, its lowest level since it reached $0.7 billion at the end of 1978. While both exports and imports of goods dropped significantly, exports fell to a greater extent. Most of the declines in the value of goods were concentrated in trade with the United States.

Exports were down $19.1 billion to $97.2 billion as energy products, industrial goods and automotive products recorded significant reductions. Energy exports were down again as prices continued to decline. Energy exports have lost almost half of their value over the last two quarters. Foreign sales of industrial products declined further on lower prices and volumes, following a high in the third quarter of 2008. Automotive products reached their lowest export values in more than 16 years, as volumes of passenger cars and vehicle parts fell sharply.

Imports were reduced by $16.5 billion to $96.4 billion, as automotive products hit a 15-year low of $11.9 billion on lower volumes of passenger cars and vehicle parts. Energy products were down 35% as volumes and especially prices retreated in the quarter. Machinery and equipment and industrial goods also registered notable declines, largely on lower volumes.

Services deficit remains unchanged

The services deficit remained at $6.1 billion in the first quarter of 2009. Receipts on commercial services were down in the first quarter, bringing that deficit to its highest level since the second quarter of 2004. However, the travel and transportation deficits edged down despite another significant quarter of spending by Canadians travelling in countries other than the United States. In particular, Canadian's expenditures in United States continued to decline, resulting in a further reduction in the travel deficit with the United States.

Deficit on investment income narrows

The investment income deficit narrowed to $3.3 billion in the first quarter of 2009 from $5.1 billion in the previous quarter. This was largely accounted for by direct investment earnings, where profits earned by foreign direct investors in Canada fell to their lowest level since the end of 2004.

Capital and financial account

Foreign demand for Canadian securities resumes

Non-resident investors purchased $23.3 billion of Canadian securities in the first quarter of 2009, after net sales in the previous two quarters. Foreign investment inflows reflected continued strong interest in Canadian short-term paper and a return to the Canadian bond market.

Robust foreign investment in Canadian money market instruments of $9.2 billion over the first quarter was dominated by acquisitions of federal and provincial short-term paper, as short-term interest rate differentials favored investment in Canada. In addition, purchases of $11.4 billion of Canadian bonds almost offset the divestment in the previous quarter. This activity was focused on bonds issued by private corporations and the federal government. The market for new corporate bonds showed signs of recovery, as yield spreads with government securities narrowed.

Non-residents also added $2.6 billion of Canadian equities to their portfolios in the first quarter, following two quarters of net sales. The focus of foreign investment shifted from gold to banking shares during the quarter. Canadian stock prices declined 3% in the first quarter after losing more than one third of their value over the second half of 2008.

Canadian investors return to foreign stock markets

Canadian investors switched back into foreign securities in the first quarter of 2009 after a substantial divestment in the fourth quarter of 2008, following the collapse of global stock markets in October 2008. Investment in foreign equities was the highest in eight years at $10.8 billion. Canadian investment shifted from US stocks to non-US stocks over the quarter and covered a wide range of stocks from various economies and industries.

Investment in foreign debt instruments resumed moderately after a number of quarters of net sales, since the onset of the global credit concerns in 2007. Most of the investment was directed to short- and long-term US government debt instruments, in line with significant borrowing activity in the period.

Foreign direct investment activity reduced

Direct investors both in Canada and from abroad cut back on their cross-border flows in the first quarter of 2009, as mergers and acquisitions activity dried up. Canadian direct investment abroad amounted to $4.2 billion, the lowest in six years. Investments were largely directed to the finance and insurance sector, while activity related to the energy and metallic mineral sector resulted in a rare decrease in assets.

Foreign direct investment inflows into Canada in the first quarter were the lowest in four years. Earnings re-invested in Canadian subsidiaries were down again while non-residents sold some of their assets back to Canadians, as investment from the United States and Britain was more than offset by divestment from other European countries.

Canadian depository institutions repatriate funds

Transactions in the other investment account resulted in net inflows of $9.7 billion. Canadian investors (mostly banks) repatriated deposits from abroad after large increases totalling almost $80 billion in 2007 and 2008, a period characterized by turbulence in credit markets.