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Balance of international payments
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Third quarter 2008
Balance of international payments note to readers
Highlights
The current account surplus with the rest of the world (on a seasonally adjusted basis) dropped to $5.6 billion in the third quarter of 2008, down from $8.2 billion in the previous quarter. The reduction was largely as a result of a lower goods surplus, as commodity price gains slowed; and, a higher investment income deficit, as Canadian earnings on foreign direct investment were down.
Chart D.1 Current account surplus falls due to lower trade surplus and higher investment income deficit
In the capital and financial account (unadjusted for seasonal variation), cross-border direct investment flows strengthened, with notably large Canadian direct investment abroad and a resumption of foreign acquisition of Canadian companies. In contrast, with deteriorating conditions on equity and credit markets, Canadian investors’ demand for foreign securities slowed while non-resident investors reduced their holdings of Canadian stocks and bonds.
Goods surplus falls, as export prices slow
In the third quarter, the goods surplus narrowed to $15.2 billion as the growth in imports outpaced that of exports. Export growth slowed considerably in the quarter, though receipts were up $3.7 billion. The largest increases were recorded in industrial goods, generally reflecting price gains across most commodities. However, the $1.0 billion increase for metal ores was almost exclusively on higher volumes.
Energy products exports decreased somewhat in the third quarter, as volumes were down while prices continued to advance. However, price gains were at a much reduced pace, compared with recent quarters. Natural gas prices (+4.3%) and crude petroleum prices (+1.6%) decelerated sharply from the second quarter increases of 30% and 23% respectively. The exception was coal products, which recorded a second consecutive price increase above 50%.
Imports rose by $4.7 billion in the third quarter. The increase was distributed among all major groups of products. Imports of industrial goods were up $1.4 billion entirely due to higher prices.
Chart D.2 Imports grow faster than exports while investment income deficit surges
Investment income deficit led by decline in earnings on Canadian direct investment
The investment income deficit increased $1.8 billion in the third quarter. Profits earned on Canadian foreign direct investment positions fell back $1.2 billion, after a high in the second quarter. Despite this reduction, earnings accruing to Canadian direct investors remain at historically high levels.
Payments were also up in the third quarter. Earnings of foreign direct investors were up marginally as the Canadian energy sector marked another record profit quarter, moderated by a reduction of profits in the financial and insurance sector. As well, payments on portfolio foreign investment edged up in the third quarter. This largely reflected higher interest paid on Canadian bonds owned by non-residents, especially for U.S. dollar denominated corporate bonds.
Chart D.3 Lower earnings for Canadian direct investors push the investment income deficit up
Services deficit falls, on reduced spending on commissions and travel
The overall deficit on services narrowed by $0.3 billion in the third quarter. This easing was led by a decline in the commercial services deficit, with most of the change related to lower commissions paid on transactions in securities.
For a third consecutive quarter, the travel deficit eased, down from the fourth quarter 2007 peak. Spending by Canadians was down for both United States and overseas destinations, possibly dampened by the depreciation of the Canadian dollar over the quarter. However, foreign spending in Canada remained unchanged, despite fewer tourists coming to Canada. The transportation deficit edged up in the third quarter, largely on higher payments associated with more Canadians travelling overseas.
Foreign direct investment activity picks up
Foreign direct investment cross-border flows increased significantly in the third quarter after having slowed in the second quarter. Canadian direct investment abroad outpaced foreign direct investment in Canada, a trend observed since the beginning of the year.
Chart D.4 Foreign direct investment increases speed as outward investment again surpasses inward investment1
Canadian direct investors placed $29.0 billion in foreign economies, the highest outflows on this account in four years. The bulk of this investment was generated from the finance and insurance sector, and represented an injection of funds into existing foreign subsidiaries, largely in the U.S.
Two thirds of all the direct investment abroad to date in 2008 originated from the financial sector of the Canadian economy, similar to the average of the last three years. On a geographical basis, direct investment in the U.S. has accounted for about 60% of the total investment so far in 2008, in line with the trend observed in 2007.
Foreign direct investment in Canada rebounded from a low in the second quarter, reflecting in part foreign acquisitions of Canadian firms. Inflows of $17.4 billion in the third quarter were mainly comprised of investment from the United States and Europe, with almost half directed to the Canadian energy and metallic minerals sector.
Portfolio investors shed debt instruments
International transactions in securities in the third quarter reflected conditions on global debt and equity markets and were likely influenced to an extent by a weakening domestic currency and declining short-term interest rates in the Canadian and US markets. As a result, Canadian investors purchased foreign securities at a much reduced pace than over the previous three quarters, while non-resident investors sold Canadian securities.
Chart D.5 Non-residents sell Canadian securities while Canadians invest in foreign securities at a reduced speed
Acquisitions of foreign securities by Canadian investors slowed to $796 million over the third quarter 2008. With interest rates in decline, investors further reduced their overall holdings of debt instruments − mainly, U.S. government bonds. In addition, they continued to add corporate shares to their foreign portfolios, almost all U.S. shares. This represents a largely consistent investment pattern over the last four quarters, coinciding with the tightening of worldwide credit conditions in the latter part of 2007
Chart D.6 Canadian portfolio investors continue to favour foreign stocks over foreign debt instruments
On the other hand, while Canadian bonds have been a relatively attractive investment over the same period, foreign investors lost their appetite for these instruments in the third quarter of 2008. Non-residents sold $7.0 billion of Canadian securities, both bonds and equities, following unprecedented acquisitions the quarter before. The reduction in holdings of Canadian bonds and equities was moderated by a second consecutive quarter of investment in the Canadian money market, as interest rates continued to slide.
Despite an overall foreign divestment in Canadian securities, non-residents added Canadian debt instruments denominated in U.S. dollars, amounting to $5.9 billion during the third quarter.
Data tables
Information on methods and data quality available in the Integrated Meta Data Base: 1534, 1535 and 1536.
