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Canada's balance of international payments
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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 1
Current account balance
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.
Current account
Goods surplus falls, as export prices slow
The goods surplus narrowed to $15.2 billion in the third quarter, 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.
Note to readersThe balance of payments covers all economic transactions between Canadian residents and non-residents, in two accounts—the current account and the capital and financial account. The current account covers transactions in goods, services, investment income and current transfers. Exports and interest income are examples of receipts, while imports and interest expense are payments. The overall balance of receipts and payments is Canada's current account surplus or deficit. The capital and financial account is mainly composed of transactions in financial instruments. Financial assets and liabilities with non-residents are presented in three functional classes: direct investment, portfolio investment and all other types of investment. These flows arise from financial activities of either Canadian residents (foreign assets of Canadian investors) or non-residents (Canadian liabilities to foreign investors). Transactions resulting in capital inflows to Canada are presented as positive values while those giving rise to capital outflows from Canada are shown as negative values. In principle, a current account surplus corresponds to an equivalent net outflow in the capital and financial account; and, a current account deficit corresponds to an equivalent net inflow in the capital and financial account. In other words, the two accounts should add to zero. In practice, as data are compiled from multiple sources, this is rarely the case and gives rise to measurement error. The statistical discrepancy is the unobserved net inflow or outflow. |
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 as a result of higher prices.
Chart 2
Goods and other current account balances
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 US dollar denominated corporate bonds.
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 travellers coming to Canada. The transportation deficit edged up in the third quarter, largely on higher payments associated with more Canadians travelling overseas.
Capital and financial account
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 3
Foreign direct investment
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 United States.
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 United States 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 compared with the previous three quarters, while non-resident investors sold Canadian securities.
Chart 4
Foreign portfolio investment
Acquisitions of foreign securities by Canadian investors slowed to $796 million over the third quarter of 2008. With interest rates in decline, investors further reduced their overall holdings of debt instruments—mainly, US government bonds. In addition, they continued to add corporate shares to their foreign portfolios, almost all US 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
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 US dollars, amounting to $5.9 billion during the third quarter.
Available on CANSIM: tables 376-0001 to 376-0017 and 376-0035.
Definitions, data sources and methods: survey numbers, including related surveys, 1534, 1535, 1536 and 1537.
The third quarter 2008 issue of Canada's Balance of International Payments (67-001-XWE, free) will be available soon.
The balance of international payments data for the fourth quarter of 2008 will be released on February 27, 2009.
For more information, or to enquire about the concepts, methods or data quality of this release, contact Client Services (613-951-1855; infobalance@statcan.gc.ca), Balance of Payments Division.
