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Analysis — Second quarter 2010

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Canada's overall current account deficit (on a seasonally adjusted basis) widened by $2.6 billion to reach $11.0 billion in the second quarter, marking the seventh straight quarter of deficit. Export growth for goods slowed while import growth remained strong, which led to a deterioration in the merchandise trade balance. At the same time, a lower deficit on investment income flows with non-residents was partially offset by a higher deficit on international trade in services.

Cross border financial transactions (unadjusted for seasonal variation) resulted in further significant inflows of funds to the Canadian economy in the second quarter, led again by foreign purchases of Canadian securities. Non-residents acquired Canadian bonds at an unprecedented rate and foreign investment in Canadian stocks rebounded.

Note to readers

The balance of international 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.

The capital and financial account is mainly comprised of transactions in financial assets and liabilities.

In principle, a current account surplus/deficit corresponds to an equivalent net outflow/inflow in the capital and financial account. In practice, as international transactions 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.

For more information about the balance of payments, consult the "Frequently asked questions" section in the National economic accounts module of our website. The module also presents the most recent balance of payments statistics.

Current account

Swing in the goods balance led by trade flows with the United States

The balance on trade in goods declined $2.5 billion in the second quarter to return to a deficit position, following two quarters of surplus. Exports advanced by less than imports, largely reflecting trade results with the United States. The goods surplus with the United States shrank by $2.3 billion, following two quarters of gains.

Exports of goods rose by $1.2 billion, substantially less than in the previous quarter. Energy products and industrial goods were the two main contributors to the recovery in goods exported during the previous three quarters, but they both declined in the second quarter of 2010.

The exports of energy products fell $1.9 billion in the second quarter, with prices down for all components except coal. Overall, volumes were unchanged, as lower volumes of crude petroleum were offset by higher volumes of natural gas. Following a gain of $5.0 billion over the three previous quarters, exports of industrial goods edged down $0.3 billion on lower volumes.

Exports of automotive products continued to gain ground, up $1.9 billion, with automobiles surpassing the $10 billion mark for the first time since the second quarter of 2007. Machinery and equipment exports were up $1.2 billion, as volumes increased after six quarters of declines and prices advanced for the first time in five quarters.

Imports of goods increased $3.7 billion in the second quarter, led by machinery and equipment imports, which rose by $1.9 billion on higher volumes for all components, while prices were down for a fifth quarter. Imports of industrial goods continued to strengthen, up $1.2 billion, with half of the gains from metal and metal ores. Automotive products imports edged up, as stronger imports of automotive parts were largely offset by lower imports of cars and trucks.

Canadian travel abroad widens the deficit on services

The deficit on trade in services expanded by $0.3 billion in the second quarter, led by travel and travel related components. The travel deficit reached a high of $3.5 billion, up $0.5 billion from the previous quarter. The transportation deficit also expanded in the second quarter, up $0.2 billion, as Canadian travellers increased purchases from foreign carriers.

Canadian spending abroad increased $0.4 billion in the second quarter, reflecting both travel to the United States and overseas destinations. Overnight trips made by Canadians were up almost 4%. However, foreign spending in Canada was down 1.1%, as both American travellers and overseas travellers reduced their spending in Canada.

International trade in commercial services registered a $0.4 billion surplus in the second quarter after being in balance the quarter before. Exports increased while imports declined slightly.

Lower payments lead to decline in investment income deficit

The second quarter saw reduced international flows of investment income, with Canadian payments down more than receipts. Direct investment income accounted for these changes.

Profits earned by foreign direct investors in Canada fell by $0.7 billion, as both earnings and dividends shrank. The largest reductions came in the food, beverage and tobacco sector and the finance and insurance sector. While Canadian direct investors received higher dividends, profits on investments abroad declined $0.4 billion, led by the finance and insurance sector.

Capital and financial account

Foreign investors continue to acquire significant amounts of Canadian securities

Non-resident acquisitions of Canadian securities amounted to $40.7 billion, more than double the investment in the first quarter. Increased inflows from abroad in the second quarter were the result of continued significant foreign investment in Canadian bonds, led by federal government bonds, as well as a rebound in acquisitions of Canadian stocks. There were also modest foreign investments in the Canadian money market following three quarters of withdrawals.

Non-residents added Canadian bonds to their portfolios for a sixth consecutive quarter, buying $32.2 billion in the second quarter. This was driven by unprecedented foreign purchases of federal government bonds of $19.4 billion, with investment in federal bonds so far in 2010 already exceeding that of 2009. The balance of the activity was largely accounted for by foreign acquisitions of new provincial bonds denominated in foreign currencies.

Foreign investment in Canadian equities rebounded in the second quarter to reach $7.9 billion, following a small divestment in the previous quarter. Against the backdrop of declining share prices, non-residents purchased gold stocks as well as investment funds tracking broad market indices. The bulk of this activity took place in May, when Canadian stock prices retreated for the first time since January 2010.

Foreign investment of $610 million in the Canadian money market in the second quarter was relatively modest and dominated by paper issued by non-financial corporations. In addition, there was marginal investment in federal short-term paper, as short-term interest rates increased to their highest level since February 2009.

Canadian investment in foreign securities remains modest and focused on equities

Canadians acquired $1.2 billion of foreign securities in the second quarter, down from a $5.2 billion investment in the first quarter. Investment in the second quarter again focused on foreign equities, while holdings of both short- and long-term debt securities were reduced.

Canadian investment in foreign equities of $4.7 billion in the second quarter was led by demand from Canadian pension plans. Over 60% of the activity targeted the American market, marking the largest such investment in the United States since the first quarter of 2009. US stock prices fell by 11.9% in the second quarter, the most pronounced decline since the fourth quarter of 2008, when global stock markets experienced significant corrections.

Canadians removed a further $2.7 billion from their holdings of foreign bonds in the quarter, on sales of US government bonds. This was partially offset by investment in non-US foreign bonds, mainly bonds issued by national governments from the European Union with high credit ratings. Canadians also divested $744 million of foreign money market instruments after two quarters of investment, mostly through reduced holdings of paper issued by US financial corporations.

Outward direct investment strengthens and inward direct investment slows

Canadian direct investment abroad advanced to $9.4 billion in the second quarter, following a net repatriation of funds in the first quarter. Over half of the outflows in the second quarter were channelled to the US economy, and about 20% were related to mergers and acquisitions. Direct investment abroad in the first half of 2010 was similar to levels observed in the first half of 2009; however, these still amounted to the lowest such outflows for the first six months of a year since 1996.

Foreign direct investors injected $9.7 billion into the Canadian economy in the second quarter, and although a fourth straight quarter of investment, it was down from the previous quarter. Mergers and acquisitions were a small part of this activity. Investors from the United States and the United Kingdom were again the major contributors, and the Canadian energy and metallic mineral sector continued to be the driving force with investments totalling $7.2 billion. For the one-year period ending June 2010, foreign direct investment in this sector was significant at $27.8 billion, after a major slowdown in the first half of 2009.