Canada's Current Account Deficit Largest on Record Back to 1946

The current account deficit totalled a seasonally adjusted $9.1 billion in the first quarter, slightly smaller than the consensus call for a $10.3 billion shortfall. Another narrowing in the goods trade surplus combined with a smaller investment income deficit and steady services outflow resulted in the largest current account deficit on record back to 1946.

The continued narrowing in Canada's traded goods surplus reflected declines in both the volume of exports and lower commodity prices. Imports fell as well led by declining purchases of energy products and declining imports of auto products, which fell to a 15-year low. In the investment account, the deficit narrowed as Canadian companies paid lower profits to foreign investors, partially offsetting the impact of the narrowing in the traded goods surplus.

The widening in the current account deficit highlights the impact that the slide in commodity prices has had on Canada's economy. The sharp drop in oil prices, which averaged $58/bbl in the fourth quarter and only $43/bbl in the first quarter supported another decline in the terms of trade, measured by the price of exports relative to the price of imports, in the quarter. StatsCan highlighted in today's report that Canada's energy exports have lost about half their value during the past six months. The rebound in commodity prices this quarter suggests that, on the trade side, the narrowing in the surplus will stop and the current account deficit will be smaller going forward.

While a widening current account deficit usually weighs on the Canadian dollar, the increase in risk appetite (with investors selling the U.S. dollar and buying other currencies) and the sharp rise in commodity prices has spurred a rally in the C$ this month. For the Bank of Canada, the question is whether the increase is fundamentally based and the impact that the currency's rise will have on overall financial conditions.

Heading into next week's fixed action date, we expect the Bank to hold the course and refrain from using non-traditional tools to increase the amount of monetary policy stimulus. Instead, we look for the Bank to focus on the impact that the recent easing in financial conditions compared to earlier in the year is having on the economy's outlook.

RBC Financial Group
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The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.