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Analysis — Third quarter 2009
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Canada's current account deficit with the rest of the world (on a seasonally adjusted basis) increased to a record $13.1 billion during the third quarter. This increase was again largely attributable to trade in goods, corresponding to a new high in the goods deficit. While both imports and exports of goods were up after three quarters of decline, imports advanced by more than exports. Trade in services and investment income flows had a moderating effect on the overall current account deficit.
In the capital and financial account (unadjusted for seasonal variation), cross-border transactions in securities again generated significant inflows in the third quarter, both from Canadian sales of foreign securities and foreign acquisitions of Canadian securities. Direct investment activity was up strongly as cross-border mergers and acquisitions' activity picked up substantially.
Current account
The deficit on goods expands to reach a new high
The deficit in trade in goods expanded to $4.0 billion in the third quarter. Both exports and imports of goods increased in the quarter, following three quarters of declines. Geographically, Canada continues to record a surplus on goods trade with the United States; however, this bilateral surplus continued to narrow in the third quarter, as Canadian imports from the United States advanced at a faster pace than Canadian exports to American markets.
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.
In the third quarter of 2009, the International Monetary Fund (IMF) implemented significant new allocations of Special Drawing Rights (SDRs) to its member countries. An SDR is an international reserve asset, created by the IMF, to supplement its member countries' official reserves.
As recommended by the IMF, new allocations of SDRs in the balance of payments and international investment position accounts should be reported in compliance with revised international standards as of the third quarter of 2009. The new practice, which consists in recording allocations of SDRs as increases in reserve assets and increases in long-term liabilities, was implemented in the Canadian Balance of Payments and is consistent with the sixth edition of the IMF's Balance of Payments and International Investment Position Manual.
Overall exports of goods were up $2.4 billion to $90.3 billion. The largest pickup was in automotive products, where exports of passenger cars rose $2.0 billion after two particularly low quarters. In addition, crude petroleum exports were up by $1.1 billion, on higher volumes. After declining for three consecutive quarters, industrial goods improved slightly, largely on prices.
However, the export picture for other commodities moderated these gains. Exports of natural gas remained unchanged, as higher volumes were offset by lower prices. Natural gas prices continued to decline in the third quarter, and stood at one-third the level of the same quarter last year. Agricultural products were down $1.4 billion, largely through lower volumes of exported wheat and canola.
Total imports of goods rose $4.8 billion to $94.2 billion. The largest increase was in automotive products, up $2.6 billion, distributed evenly among cars, trucks, and parts. Volumes of crude petroleum were up in the third quarter, leading the $0.9 billion increase for energy product imports. Imports of machinery and equipment also increased $0.9 billion, despite lower prices observed for all components.
Services deficit contracts marginally
The services trade deficit narrowed slightly in the third quarter. Exports of commercial services fell by less than imports, while minimal changes were recorded for the other services. The travel deficit remained unchanged, as Canadians reduced their spending in United States but increased it in other countries.
Deficit on investment income narrows
The deficit on investment income shrank in the third quarter, largely due to stronger earnings on Canadian direct investment abroad, led by the finance and insurance sector. Direct investment income gains were partially offset by lower dividends received by Canadian portfolio holders of foreign stocks. A rebound in Canadian corporate profits in the quarter coincided with higher investment income payments to foreign direct investors, primarily in the form of dividends.
Capital and Financial Account
Foreign acquisitions of Canadian stocks up strongly
Foreign investors' overall purchases of Canadian securities remained sizable at $19.0 billion in the third quarter, and were largely comprised of Canadian equities. However, foreign investment in Canadian bonds slowed and non-residents disposed of Canadian short-term paper for the first time in six quarters.
Non-residents added $15.1 billion of Canadian stocks to their portfolios in the third quarter. This activity was dominated by continued strength in secondary market transactions. It also reflected Canadian firms issuing new shares to non-resident portfolio investors as part of the financing of acquisitions of foreign firms, as cross-border direct investment acquisitions resumed in the third quarter.
Non-residents invested a further $10.6 billion in bonds over the quarter, following unprecedented investments in the previous quarter. This reflected sustained purchases of federal bonds as well as new issues of private corporate bonds. On the other hand, non-residents disposed of $6.8 billion of Canadian money market instruments, all government paper. This marked the first quarterly reduction in holdings of these instruments since the first quarter of 2008.
Canadians divest of foreign securities
Canadian investors reduced their holdings of foreign securities in the third quarter, removing $5.5 billion from their portfolios. This was the first divestment observed since the fourth quarter of 2008 when conditions on global financial markets deteriorated markedly.
This activity was largely attributable to a further decrease in holdings of foreign debt instruments in the third quarter. Divestment in foreign bonds reached $7.5 billion, and was the result of Canadian investors reducing their exposure to both US Treasury bonds and non-US Maple bonds. A small reduction in holdings of foreign money market instruments also contributed to the divestment in the third quarter. Canadians have reduced their exposure to foreign debt instruments by $45.3 billion since the onset of global credit concerns in the summer of 2007.
Canadians added $2.3 billion of foreign equities to their holdings in the third quarter, significantly lower than the $7.3 billion average of the previous two quarters. The majority of this activity was comprised of US equities, as purchases of foreign shares from other jurisdictions slowed considerably. This was a period when major global stock markets posted gains.
Cross-border direct investment activity rebounds
Both Canadian direct investment abroad ($25.6 billion) and foreign direct investment in Canada ($17.0 billion) reached their highest levels to date for 2009 in the third quarter, following two quarters of subdued cross-border financial transactions. This renewed strength was mostly attributable to a pickup in direct investment acquisitions activity.
About 75% of outward direct investment in the third quarter was explained by Canadian firms' acquisitions of foreign firms. On a geographical basis, Canadian direct investment abroad mainly targeted the United States, as the Canadian dollar appreciated 6.3% against the US dollar and the US economy showed signs of recovery in the third quarter.
Foreign direct investment in Canada also picked up steam and was almost equally comprised of inflows from mergers and acquisitions and injections of funds into operations of existing Canadian subsidiaries. Inward direct investment in the third quarter originated from a variety of countries, notably the United States ($7.1 billion) and countries of the European Union ($7.9 billion).
Canada’s international official reserves generate large movements of funds
Transactions in the other investment account of the balance of payments resulted in a net outflow of $10.5 billion in the third quarter. This mostly reflected an increase in official reserve assets denominated in US dollars and in short-term loan assets.
Also evident in the flows, Canada's official international reserves changed significantly as a result of the International Monetary Fund implementing new allocations of Special Drawing Rights, which added close to $9 billion to both reserve assets and long-term liabilities in the third quarter.
