Canada's long-running era of current account surpluses could soon come to an end as the commodity bust drags down trade flows that helped propel the country's economy for years, economists warn.
The current account surplus, a broad measure of international trade that includes goods, services, investment income and other areas, shrank to $5.6 billion on a seasonally adjusted basis, down from an upwardly revised $8.2 billion in the second quarter, Statistics Canada reported yesterday.
The third-quarter figure was higher than economists had expected, and shows that Canada is still selling more to the rest of the world than it is buying.
But in a research note, CIBC World Markets economist Krishen Rangasamy said it would "likely be the last hurrah on our external balance," noting that skyrocketing commodity prices have more than made up for falling export volumes over the past five quarters.
"Now that (commodity prices) have come back to earth, and given that the global recession does not bode well for a recovery in real exports, a current account deficit looms for upcoming quarters," Rangasamy wrote.
The current account provides a reading on a country's capital flows as they relate to other countries. While a current account deficit in the short term is little cause for alarm, economists say persistent deficits can weigh on a country's currency and lead to increased debt levels.
The Canadian dollar has already sunk sharply this year as prices for important Canadian commodity exports such as oil, natural gas and metals have tumbled.
Canada has not run a current account deficit since the second quarter of 1999.
In an interview, Rangasamy said he expects the current account will dip into negative territory in the final quarter of this year. He also sees an $8.5 billion current account deficit for next year as a whole, although he thinks a recovery in commodity prices and global growth late next year will drive a surplus in the fourth quarter of 2009.
Douglas Porter, deputy chief economist at BMO Capital Markets, said in a research note that the current account will "struggle to stay in the black" in the fourth quarter of this year. He predicted a current account deficit of $10 billion or more in 2009.
In an interview, Porter said the third-quarter current account surplus showed "a healthy picture, but it's looking in the rear-view mirror because commodity prices peaked at the very start of the third quarter and then they've been sliding ever since."
Oil prices have plummeted more than 60 per cent since peaking around $147 (U.S.) in mid-July. Light, sweet crude closed down a penny yesterday at $54.43 (U.S.).
Porter also noted that "the amount of goods we're going to be able to sell to the United States is undoubtedly slowing rapidly with the sharp decline in U.S. sales."
That could have a significant impact on the current account since Canada exports many goods to the U.S. The third-quarter current account numbers showed the goods surplus shrank to $15.2 billion, from $16.2 billion in the previous quarter, as growth in imports outpaced growth in exports, Statistics Canada said. Canada's deficit in services narrowed by about $300 million, due largely to lower fees paid on securities transactions.
Meanwhile, the country's investment income deficit nearly doubled to $3.8 billion, driven by a drop in profits Canadian investors earned abroad.
On the face of it, a shrinking current account likely won't help the loonie recover from its recent slump against the U.S. dollar. Aside from tumbling commodity prices, the loonie has been dragged down by political uncertainty around Prime Minister Stephen Harper's minority government and the apparent collapse this week of the sale of BCE Inc. The Canadian dollar closed yesterday at 80.84 cents (U.S.), down 0.39 of a cent.
But Stewart Hall, an economist at HSBC Securities (Canada), said he isn't "overly worried from the standpoint of market perception."
"I think the currency market is looking more toward those emerging market economies that have a big demand to finance external liabilities as being really kind of the weak links of the currency market," he said, adding that Canada isn't viewed as "one of those weak links in the currency chain."
Porter also suggested a current account deficit wouldn't necessarily be the end of the world.
"There's nothing necessarily healthy or unhealthy about a (current account) surplus or a deficit in any given year. You have to take into account everything else that's going on," he said.
"But what's not healthy is a decade or two decades of deficits each and every year like we've seen in the U.S., whereas in Canada we've seen surpluses pretty steadily since the start of this decade, which indicates that Canada has been living within its means as a broad economy this decade."
source: thestar.com
link to the original post:
http://www.thestar.com/Business/article/545725
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