Balance of international payments

First quarter 2004

Highlights

Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, rose $2.8 billion in the first quarter to $9.5 billion, its highest level in three years. A higher surplus on trade in goods led to the increase.

The capital and financial account (not seasonally adjusted) showed funds flowing out of Canada to the rest of the world for a fourth straight quarter. Canada’s direct and portfolio assets abroad went up, but at a slower pace than in the fourth quarter. There were offsetting changes to Canada’s liabilities: non-residents invested in direct and portfolio securities but residents reduced some of their deposit liabilities.

During the quarter, the Canadian dollar declined slightly against the US dollar after its strong appreciation over 2003. Against other foreign currencies however the story was mixed as the Canadian dollar was up against the Euro but down sharply against the British pound and the Japanese yen.

Second highest surplus ever on the Current account

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Current account

Goods surplus rebounds

The surplus on trade in goods reached $17.5 billion in the first quarter, up $3.4 billion from the fourth quarter.

After three quarters of decline, exports increased by $4.0 billion to $101.5 billion. Once again, the largest change came from energy products as prices rebounded. Higher exports of industrial goods, and machinery and equipment products were led by exports of aircraft, engines and parts. Exports of automotive products fell slightly but have remained relatively stable over the last four quarters.

Imports increased by $0.5 billion to $84.0 billion. Imports of industrial goods and machinery and equipment products each increased approximately half a billion dollars. Automotive product imports declined by $0.5 billion, reversing most of the gain observed in the fourth quarter.

Goods surplus rebounds strongly

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Lower profits earned on direct investment abroad

The deficit on investment income increased $0.5 billion to $5.0 billion as profits earned on Canadian direct investment abroad dropped $0.7 billion. Despite this, Canada registered its second lowest deficit on investment income in more than 12 years.

The $4.3 billion of profits earned abroad were lower as a result of declines in the electrical products, and wood and paper sectors. These reductions were partially offset by higher profits in the finance and insurance sector.

At the same time, profits earned by foreign investors on their direct investments in Canada decreased $0.2 billion. The largest decrease came from the finance and insurance sector.

Services deficit remains stable

In the first quarter, the deficit on trade in services grew by $0.1 billion to $3.0 billion. All major components saw little change from the previous quarter.

Payments on travel services increased more than receipts as the number of Canadians traveling abroad remained relatively stable while slightly fewer foreign visitors, especially from the United States, came to Canada. The first quarter deficit in travel services at $1.3 billion was the highest since the end of 1993.

The transportation deficit increased slightly. This increase was concentrated in goods transportation as the deficit on passenger fares did not change. A small widely spread improvement in the commercial services deficit partially offset these declines.

Direct investment abroad moderates¹

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Financial Account

Direct investment abroad moderate

After the robust $19.3 billion investment of the fourth quarter, Canadian direct investment abroad returned to a moderate $4.8 billion in the first quarter. It was a level similar to the first three quarters of 2003. About a third of the quarter’s investment went to the acquisition of a number of foreign enterprises. Just under half was invested in American companies with the rest geographically spread out. Industrially, the investment was led by the energy and financial industry groups.

Portfolio investment abroad focused on bonds¹

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Canadian investment in foreign securities concentrated in bonds

Canadian investors bought $2.7 billion of foreign securities in the first quarter, just half the value of the fourth quarter of 2003. It was, however, in line with the five quarters prior to the fourth quarter.

Canadians bought $2.6 billion worth of foreign bonds, half of which went to overseas bonds, the most in four years. The remainder went to US corporate bonds and US treasuries. While overall Canadian investment in foreign equities was negligible, investors bought $2.7 billion worth of US shares while selling a similar amount of overseas shares.

Foreign direct investment returns to Canada after two negative quarters

The foreign acquisition of a Canadian corporation helped raise foreign direct investment to $5.3 billion in the quarter. This came after two negative quarters when foreign investors withdrew funds from Canada. Over two-thirds of first quarter direct investment came from the United States. On an industry basis, the foreign investment went to the communications sector. At the same time, the machinery and transportation equipment industry saw some withdrawals of funds.

Foreign investors continue to buy Canadian equities

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Foreign portfolio investment in Canadian securities continues

Foreign portfolio investment of $4.4 billion flowed into Canadian securities in the quarter, after the major $10.1 billion injection in the fourth quarter. Foreign demand for Canadian equities continued; while for debt instruments foreign investors purchased Canadian bonds but sold a similar amount of money market securities.

With Canadian stock prices continuing to increase in the first quarter, foreign investors purchased $4.3 billion of Canadian equities. Some $5.6 billion was invested in existing shares, partly offset by a $1.3 billion outflow, related to the acquisition noted earlier. Foreign investment in existing shares was at a three-and-a-half year high. Foreign investors bought a wide array of stocks led by issues of resource companies, manufacturers, and banks.

Foreign investment returns to Canadian-dollar bonds

Canadian bonds continued to attract foreign investment during the quarter as foreign investors bought $2.9 billion worth of bonds issued by federal enterprises and corporations. The investment originated in the United States and Asia. On a currency basis, foreign investors acquired $3 billion and $1.2 billion respectively of Canadian-dollar and US-dollar denominated bonds but sold $1.3 billion denominated in other foreign currencies.

Foreign holdings of Canadian money market paper were reduced by $2.8 billion in the quarter. Two-thirds of the reduction was in federal treasury bills with the rest split between paper issued by corporations and federal enterprises.

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Other investment

In the first quarter, net transactions in the other investment category led to capital outflows. This reversed a similar capital inflow registered in these accounts in the fourth quarter. Principally, deposit liabilities of Canadian banks were drawn down in the first quarter. There was a small increase to Canada’s international reserves halting six consecutive quarters of decline.

Note to readers

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Statistical tables

• Balance of payments
• Current account

Information on methods and data quality available in the Integrated Meta Data Base: 1533, 1534, 1535, 1536 and 1537.