Financial flows

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Third quarter 2007

Financial flows note to readers

Highlights

Total funds raised by domestic non-financial sectors on financial markets amounted to $166.1 billion in the third quarter of 2007 (seasonally adjusted at annual rates), up from the second quarter of 2007. Households led the private sector’s demand for funds. After the second quarter’s large reduction in marketable debt, the overall government sector returned to financial markets. Other levels of government substantially increased their borrowings, offsetting the significant debt reduction posted by the federal government.

Chart E.1 Overall demand for funds increases

The key financial market indicators registered slightly differing signals in the quarter. The S & P/Toronto Stock Exchange Composite Index declined slightly in July and August but recovered in September to carry the third quarter closing to a 1.4% increase over that of the second quarter. With the country’s strong domestic economy and the sustained demand for Canadian-produced commodities such as crude oil and metals, the Canadian dollar continued to appreciate against the US dollar, closing the quarter above par against the US dollar, a 30-year high. For the first time since May 2006, the bank rate increased by a quarter of a percentage point in July. Despite this increase in the bank rate, mortgage rates remained fairly steady during the third quarter following the modest increases posted in the previous quarter. After recording moderate gains during the second quarter, bond yields showed a slight decline during the last two months of the third quarter.

Household sector

The household sector’s overall borrowing increased in the third quarter, as mortgage borrowing remained robust spurred on by growth in housing starts. The demand for consumer credit remained strong as expenditure on services and semi-durable goods continued to increase, compensating for declines in consumer spending on durable and non-durable goods.

Overall household debt in the form of mortgages and consumer credit grew, amounting to 115.7% of personal disposable income. However, debt servicing charges remained stable at about 8% of personal disposable income.

Investment in financial assets by the household sector was again led by the acquisition of deposits and pension assets.

Chart E.2 Household borrowing continues to rise

Corporate sector

The corporate sector remained a net lender to the rest of the economy in the third quarter, even while building inventories and continuing to increase investment in fixed capital. Undistributed corporation profits, which make up the bulk of corporate saving, rebounded after two successive quarters of declines.

For private non-financial corporations, there was a significant slowdown in net new share issuance. Financial institutions continued to strengthen their overall positions. Their significant reduction in foreign holdings of equities, money market and fixed income instruments was more than offset by their net acquisition of domestic fixed income instruments.

Government sector

The federal government continued its trend of debt reduction in the third quarter with a second straight quarter of significant net redemption of short-term debt. This was, however, offset by net new financing by other levels of government, notably through net new issuance of short-term paper and bonds by the provinces. Nevertheless, as revenue remained strong, the overall government sector continued to maintain its surplus position.

Chart E.3 Total government borrowing rebounds

Data tables

• Table E.1 Financial market summary table
• Table E.2 Sector accounts - Persons and unincorporated businesses
• Table E.3 Sector accounts - Corporations and government business enterprises: Total
• Table E.4 Sector accounts - Government
• Table E.5 Sector accounts - Non-residents

Information on methods and data quality available in the Integrated Meta Data Base: 1804.