Canada's Current Account Deficit Hits Record High

The current account deficit was C$13.1 billion in the third quarter, slightly smaller than market expectations. The second-quarter deficit was revised to C$11.9 billion from the previous estimate of C$11.2 billion. A widening in the goods deficit more than offset a marginal narrowing in the services deficit and smaller investment income shortfall.

Canada's traded goods balance moved further into deficit in the third quarter as the increase in exports was significantly slower than the rise in imports. This increase in the deficit marked the second quarter in a row that the goods account has been in deficit. Exports of automotive products, crude oil and industrial goods increased in the quarter. Imports rose, led by increasing purchases of automotive products, crude petroleum and machinery and equipment. The services deficit narrowed slightly, while the travel account was little changed with a C$3.2 billion deficit. In the investment account, the deficit narrowed as Canadian companies received higher earnings from investments abroad. Higher Canadian corporate profits increased dividends paid to non-residents, moderating the decline in the deficit.

The widening current account deficit reflects the growing gap in the traded goods account, although after three consecutive double-digit annualized declines in Canadian exports, sales abroad increased by 11.8%. Similarly, Canadian demand for imported goods recorded a solid quarterly rise of 23.4% at an annual rate.

The rapid rise in imports in the third quarter points to the trade sector acting as a significant drag on the pace of GDP growth. RBC estimates that net exports trimmed 4.2 percentage points from the quarterly economic growth rate, resulting in a tepid 0.6% annualized gain for the economy in the quarter. Other segments of the economy including consumer and business spending as well as the rebuilding of inventories likely compensated for the trade sector's shortfall and skated the economy's growth rate back into positive territory following three consecutive quarterly declines.

The Bank of Canada has been monitoring the downside risk to the economic recovery should the strength in Canada's currency limit demand for exports, leading to a slower recovery and delaying the return of inflation to the 2% medium-term target. With commodity prices continuing to firm and U.S. demand for Canadian auto exports likely to grow as the auto sector gets back on its feet, worries about the impact of the currency's strength are likely to lessen.

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.