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Analysis — Second quarter 2009

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Canada's overall current account deficit expanded to $11.2 billion during the second quarter of 2009, which also marked the first quarterly deficit on international trade in goods in more than 30 years. This marked the third quarterly current account deficit since the Canadian economy contracted in the fourth quarter of 2008.

In the capital and financial account (unadjusted for seasonal variation), net borrowing from abroad continued. In particular, cross-border financial flows in securities provided substantial inflows of funds to Canada in the second quarter of 2009. A large part of this activity was led by a surge in new issues of Canadian bonds purchased by foreign investors.

Note to readers

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

Balance on goods deteriorates to register first deficit since 1976

The value of Canada's international trade in goods continued to shrink in the second quarter of 2009, with the decline in exports again exceeding that of imports. Goods exports fell $9.3 billion to $87.6 billion, with reductions spread over most commodities. For their part, imports of goods were down $6.8 billion to $89.4 billion. As a result, the overall goods balance (-$1.7 billion) posted a deficit for the first time since the first quarter of 1976. Trade flows with the United States have been a significant factor in this development as the bilateral goods surplus with the United States narrowed further, down $3.2 billion in the second quarter from the previous quarter. Over the last three quarters, the bilateral goods surplus with the United States has fallen by $17.6 billion.

Reductions on total exports were widespread in the second quarter. Machinery and equipment were down $3.5 billion as volumes dropped for all components. Industrial goods fell $2.2 billion mainly on lower volumes, amounting to a drop of almost 40% over the last three quarters. Sales of automotive products edged down in the second quarter following a significant reduction in the previous quarter. The value of energy products sold abroad declined $1.8 billion. Natural gas prices fell by more than one-third during the quarter, which led to a reduction of $2.3 billion in the value of exports for that commodity; however, exports of crude petroleum were up $1.3 billion, despite lower volumes.

As the Canadian dollar appreciated (+8.5% against the US dollar), lower prices were more important in explaining overall import declines in the second quarter. Imports of machinery and equipment dominated with a decline of $3.2 billion, about evenly accounted for by lower volumes and lower prices. Industrial goods imports fell $2.4 billion, led by lower prices for almost all the commodities and supplemented by lower volumes for metals and metal ores. Automotive products were flat in the second quarter, following a large import decline in the first quarter. Imports of energy products were largely unchanged in the second quarter, as increases in volume of crude petroleum were more than offset by declines in the volumes of other energy products.

Services deficit narrows, while investment income deficit expands

The overall services deficit narrowed in the second quarter as deficits in transportation and in commercial services were reduced somewhat. Both transportation payments and receipts continued to decline in line with lower activity in merchandise trade. Commercial services payments edged down, despite an increase in the commissions paid on new issues of Canadian bonds and on trade of outstanding foreign stocks. However, the travel deficit was unchanged in the second quarter at $2.9 billion, as lower receipts from American travellers in Canada were offset by lower spending by Canadians travelling to countries other than United States.

In the second quarter, payments on investment income increased $0.7 billion such that the deficit on investment income expanded $1.0 billion. On the payments side, profits accruing to foreign direct investors were up $1.3 billion, largely accounted for by the transportation equipment sector. At the same time, income receipts on portfolio assets were down $0.4 billion.

Capital and financial account

Foreign demand for Canadian bonds leads inflows of funds

Non-residents invested $38.3 billion in Canadian securities in the second quarter of 2009, as they acquired bonds at an unprecedented rate. This activity accounted for the lion's share of inflows of funds in the quarter. Overall, non-resident investors have picked up $62 billion of Canadian securities in the first half of 2009.

In the second quarter, foreign investors added a further $30.7 billion of Canadian bonds to their portfolios. Nearly 70% of this activity was comprised of new issues of bonds, reflecting strong borrowing of corporations and provincial governments. The remainder of this activity was mainly the result of secondary market purchases of federal bonds, as yields on these bonds increased to levels last seen in the third quarter of 2008.

In addition, non-residents continued to buy Canadian money market instruments for the fifth straight quarter but at a much reduced pace, acquiring $1.0 billion during the quarter compared with $19.5 billion in the last two quarters. Although Canadian short-term interest rates remained above US rates in the second quarter, the differential has narrowed.

Foreign investment in Canadian equities was also relatively robust as Canadian stock prices increased strongly during the quarter. The Canadian stock market rebounded between March and June with the Standard and Poor's / Toronto Stock Exchange index up nearly 20% during the period. Acquisitions of Canadian stocks by non-resident investors were up $6.6 billion in the second quarter, as investment focused on banking and other financial shares.

Canadian investment in foreign securities slows

Canadian investment in foreign securities slowed to $2.1 billion in the second quarter from $13.4 billion in the previous quarter, as investment in foreign equities was at a much reduced pace. Nevertheless, Canadian investors acquired $4.1 billion of foreign shares in the second quarter as major global stock markets posted strong gains. Investment in the quarter was equally split between US and non-US instruments: the US mainly private equities and the European shares mainly from the consumer products sector.

Meanwhile, Canadians disposed of $1.9 billion of foreign debt instruments, both bonds and short-term paper, during the second quarter. Transactions in US government debt instruments resulted in a substantial divestment of $3.3 billion, partly offset by the acquisition of $1.2 billion of non-US debt securities. This was the first net investment in non-US debt securities since the second quarter of 2007.

Direct investment activity remains subdued

Cross-border direct investment activity was again relatively moderate in the second quarter with little merger and acquisition activity. Canadian direct investment abroad of $3.8 billion in the second quarter was comprised of earnings reinvested in operations of foreign subsidiaries, largely Canadian financial firms. Foreign direct investment in Canada amounted to a withdrawal of $660 million of funds, mainly by US and British direct investors.

Reductions of other Canadian liabilities moderate total inflows of funds

Transactions in the other investment account of the balance of payments resulted in a net outflow in the second quarter. Canadian liabilities to non-residents, essentially in the form of short-term loans and bank deposits, were down $18.7 billion following sizable increases in the previous three quarters.