Balance of international payments

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Second quarter 2007

Balance of international payments note to readers

Highlights

Canada's current account surplus with the rest of the world, on a seasonally adjusted basis, increased $2.2 billion in the second quarter to $8.4 billion. Most of the gain came from the third consecutive improvement of the trade in goods surplus, as imports declined slightly in the second quarter.

Chart D.1 Highest current account surplus since the first quarter of 2006

In the capital and financial account (not seasonally adjusted), the growth in Canada’s foreign assets significantly outpaced that in international liabilities. Canadian portfolio investment in foreign securities continued to be the driving force behind the increase in foreign assets.

Current account

Goods surplus increases again

The surplus on trade in goods went up for the third consecutive quarter, reaching its highest level since the fourth quarter of 2005. The $1.6 billion increase pushed the surplus to $16.3 billion in the second quarter as imports declined by $2.0 billion.

After recording a record level during the first quarter, imports shrank $2.0 billion to $102.8 billion in the second quarter. Imports of machinery and equipment, automotive products and consumer goods all fell, largely due to lower prices. Energy products were the exception, with imports increasing by $1.1 billion from the previous quarter.

Of the $1.3 billion drop in automotive products imports, $1.0 billion was related to motor vehicle parts, which are usually closely related to the exports of cars.

Chart D.2 Goods surplus improves as import prices fall

Exports of industrial materials increased by $1.4 billion, registering its seventh consecutive record high at $27.4 billion. This was offset by declines in exports of other goods, leaving total exports at virtually the same level as in the first quarter.

Once again, the increase in exports of industrial materials was mainly due to higher prices. Most of the increase was driven by inorganic chemicals, including uranium, and nickel and copper components where prices rose, on average, by almost 30% in the second quarter.

Energy products exported increased $0.6 billion due to higher volume and higher prices for petroleum products and coal products. However, crude petroleum fell half a billion dollars during the second quarter.

These increases were offset by lower exports of automotive products and machinery and equipment. Exports of cars, trucks and parts declined $1.5 billion to $19.4 billion. There has been persistent weakness in automotive exports recently. In fact, the five lowest levels since the end of 1998 have been registered during the last five quarters.

Forestry products exports continued their downward pattern. In the last three years, exports of forestry products have declined by more than 25% as the soft U.S. housing market and the strong Canadian dollar have led to reduced export volumes as well as lower prices for Canadian producers.

Small improvement in the services deficit

For the second consecutive quarter, the services deficit declined slightly but remained near the record high.

Chart D.3 Services deficit is down but remains important

For the second consecutive quarter, the travel deficit diminished by $0.1 billion. There were more travellers from the United States visiting Canada for both same-day trips and longer trips in the second quarter, which resulted in a 4% increase in expenditures by visitors from the USA.

Canadian travel expenditure in the United States declined by 3% in the second quarter, despite an increase in the number of Canadians traveling south of the border. The increased number of travellers to the United States was mostly due to same-day trips. Although, in general, these travellers represent 60% of all Canadians going to the United States, their expenses account for only around 10% of all Canadian travel expenses in that country.

The transportation deficit also shrank by $0.1 billion, largely because of passenger fares. At the same time, the deficit in commercial services increased slightly, still at its highest level since the fourth quarter of 2004, as a higher deficit in financial services was partially offset by a lower deficit on transactions in royalties and licences fees.

Investment income deficit remains stable

As both receipts and payments barely changed in the second quarter, the deficit on investment income stood at $4.1 billion.

Chart D.4 Few changes in investment income deficit

Profits earned by foreign direct investors in Canada increased $0.4 billion to $8.5 billion, just a few million dollars shy of the record of the third quarter of 2005. This was offset in part by slightly lower payments of interest notably on corporate and provincial enterprise bonds where both sectors count on a large share of bonds issued in US dollars.

Profits from Canadian direct investment abroad dropped slightly by $0.1 billion to $7.5 billion, but still remain high by historical standards.

Interest earnings on foreign bonds continued to grow, gaining another $0.1 billion in the second quarter. Canadians have made substantial acquisitions of foreign bonds in recent years.

Financial account

Strong Canadian investment persists in foreign securities

Following a record investment of $26.0 billion in the previous quarter, Canadian investment in foreign securities continued its torrid pace in the second quarter. Continuing a well established trend, the bulk of the $23.8 billion of acquisitions was in foreign bonds with most of the remaining investment in foreign stocks.

Chart D.5 Canadians keep adding foreign bonds to their portfolios¹

Investment in foreign bonds remained robust in the second quarter as Canadian investors acquired $16.0 billion worth, nearly matching the record investment of $16.5 billion set in the first quarter. Some $10 billion worth of the investment in foreign bonds was denominated in Canadian dollars (maple bonds), bringing the year to date total to $22.8 billion.

Canadians bought a further $7.5 billion of foreign stocks in the second quarter after purchasing $9.3 billion worth in the first quarter. Almost two-thirds ($4.9 billion) went into non-U.S. stocks, the largest quarterly investment in non-U.S. stocks since the second quarter of 2001.

Investment in foreign money market paper totalled $239 million for the quarter with purchases mainly focused in issues of U.S. corporations. However, these acquisitions were largely offset by a substantial divestment of U.S. treasury bills. Over the quarter, the interest rate spread between Canada and the USA on treasury bills continued to narrow in Canada’s favour.

Direct investment abroad slides to its lowest mark in five quarters

Direct investment abroad amounted to $9.8 billion in the second quarter, a significant slowdown after four very strong quarters where investment averaged $15.7 billion.

Chart D.6 Direct investment abroad continues, but at a slower pace¹

This quarter’s investment was largely explained by additional capital injected into existing foreign affiliates, mainly reinvested earnings. Direct investment abroad was almost entirely directed to the finance and insurance industry ($9.4 billion) and targeted the U.S. economy in large measure (52%).

Acquisitions boost foreign direct investment in Canada

Foreign direct investors added another $17.1 billion into the Canadian economy during the second quarter, bringing the total investment so far this year to $39.2 billion. This was the second highest investment ever for the first six months of a year.

Chart D.7 Foreign acquisitions in the Canadian economy remain strong

The bulk of the foreign injections in the second quarter were explained by acquisitions ($12.4 billion). Over the last four quarters, foreign acquisitions in the Canadian economy have totalled $70.1 billion and represent three-quarters of all the money injected by foreign direct investors during this period.

European investors dominated in the second quarter with investments totalling $9.4 billion, followed by U.S. investors ($4.9 billion). Energy and metallic minerals continued to be a sector that attracted the attention of foreign direct investors as they invested in this sector for a tenth consecutive quarter ($9.2 billion).

Foreign investors sell some of their holdings of Canadian securities

Foreign investors sold $4.8 billion worth from their holdings of Canadian securities over the second quarter, their first divestment in two years. The quarter’s divestment occurred almost entirely in Canadian bonds with only a slight reduction in holdings of Canadian stocks. These were partially offset by non-residents’ investments in Canadian money market paper.

Non-residents withdrew $4.9 billion worth of Canadian bonds from their investment portfolios, entirely due to $6.0 billion worth of outstanding government issues, mostly issues of the Government of Canada. It was the largest foreign divestment in Canadian bonds in nearly four years and reversed a trend of strong foreign investment in these instruments since the third quarter of 2006.

Non-resident holdings of Canadian equities were reduced by $899 million over the second quarter. Foreign investment in outstanding shares ($3.3 billion) was overwhelmed by net retirements ($4.2 billion), mainly due to the foreign takeover activity. Over the last three quarters, this activity has reduced foreign portfolio holdings by $16.0 billion despite investment in outstanding shares totalling $9.3 billion. The Standard and Poor’s/Toronto Stock Exchange index rose 5.6% between March 2007 and June 2007.

Chart D.8 Foreign takeovers neutralize the investment in outstanding stocks

Non-residents bought $1.0 billion worth of Canadian money market paper during the second quarter. Investment was focused on Canadian corporate paper as foreign investors acquired $961 million worth.

Transactions in deposits, loans and reserves assets

The other investment category of the financial account, which comprises international loans, deposits and reserves, recorded a net inflow of $9.4 billion in the second quarter. This was up from a net inflow of $2.5 billion in quarter one. This was essentially due to sizable inflows of international deposits for a second consecutive quarter, which more than offset increases in Canadian assets. The Canadian dollar made significant gains during the quarter against all major currencies, closing the quarter at $93.9 US cents, up over 7 cents on the American dollar.

Data tables

• Table D.1 Balance of payments
• Table D.2 Current account

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