Analysis — Third quarter 2010

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Canada's overall current account deficit (on a seasonally adjusted basis) widened by $4.6 billion to reach a high of $17.5 billion in the third quarter. This marks the eighth quarterly deficit since the fourth quarter of 2008. Stronger imports of goods accounted for the bulk of the increase in the deficit in the third quarter, as exports of goods also weakened.

In the capital and financial account (unadjusted for seasonal variation), non-resident investors continued to supply large inflows of funds to the economy through a $28.1 billion investment in Canadian securities, while Canadian investment abroad weakened in the quarter. Canadian liabilities to non-residents, mainly in the form of bonds, have increased markedly since the first quarter of 2009.

Current account

Trade deficit on goods increases

The overall deficit on international trade in goods expanded by $4.3 billion in the third quarter to $6.5 billion. Imports were up for a fifth quarter, while exports fell for the first time since the second quarter of 2009. As in the previous quarter, the goods surplus with the United States narrowed by about $3 billion in the third quarter, as exports to the United States declined for the first time in five quarters.

Total imports of goods advanced $3.6 billion, with more than half of that increase accounted for by machinery and equipment as a result of higher volumes. Imports of consumer goods were up $0.7 billion from higher prices and volumes, while energy products increased $0.5 billion on higher volumes.

Overall, exports of goods were down $0.7 billion during the third quarter. Exports of energy products lost ground for a second quarter, down $1.6 billion. This reflected lower volumes on all commodities. This was partially offset by higher prices for some commodities, notably for natural gas. Machinery and equipment exports were up $0.7 billion, as volumes continued to strengthen. Industrial goods edged up on an increase for precious metals and alloys.

Trade in services deficit unchanged

The deficit on trade in services was unchanged in the third quarter. The deficit on international travel shrank somewhat, notably with respect to the United States, where payments were down $0.2 billion after a strong second quarter. The number of Canadians visiting the United States on overnight stays edged down, following four quarterly increases.

This was offset by an increased cross-border transportation deficit and a lower surplus on commercial services. The deficit on transportation increased, reflecting notably larger volumes of goods being imported, moderated by lower receipts for passenger fares. The surplus on commercial services fell, with receipts weakening by more than payments.

Deficit for investment income down

The investment income deficit shrank by $0.5 billion in the third quarter, as receipts were up by more than payments. On the receipt side, the increase in undistributed profits earned on Canadian direct investment abroad was partly offset by lower dividends earned by Canadian direct investors. On the payments side, there were increased dividends paid to foreign direct investors as well as slightly higher interest paid to non-resident investors on their holdings of Canadian bonds.

Capital and financial account

Canadian bonds continue to attract sizable inflows from abroad

Foreign investors further increased their holdings of Canadian bonds in the third quarter by $24.8 billion, with an increased focus on private corporate bonds. Foreign acquisitions of $9.5 billion of Canadian private corporate bonds were almost equally split between new bonds denominated in US dollars and purchases on secondary markets. The balance of the purchases was mainly in federal and provincial bonds, which remained strong but for which activity was down from the previous quarter. Nonetheless, by the end of September, foreign holdings of these government bonds had increased by nearly 60% compared with the end of 2008.

Non-residents also acquired $2.8 billion of Canadian stocks in the third quarter, down from $7.9 billion in the second quarter. Most of this was due to Canadian direct investment acquisitions of foreign firms and the resulting new issues of Canadian shares to foreign shareholders of acquired firms. Foreign activity on secondary markets was negligible, as Canadian stock prices appreciated 9.5% over the quarter.

While there were purchases of federal and corporate paper by non-residents, these were largely offset by a further reduction in foreign holdings of provincial paper, down a full two-thirds to date in 2010. By the end of September, Canadian short-term rates had exceeded their US counterparts by the largest amount since December 2008.

Canadians increase holdings of foreign securities, led byUS stocks

Canadian investors' demand for foreign equities continued, with acquisitions of $4.7 billion in the third quarter. Purchases focused on US stocks, with Canadian mutual funds accounting for the bulk of the purchases. There was also a small divestment in non-US foreign stocks, following acquisitions of $6.3 billion in the first half of the year. Major global stock markets posted gains in the third quarter, with US stock prices rebounding 10.7%.

Canadian investors also acquired $2.3 billion of foreign money market instruments, the largest in four years. This investment was mostly comprised of US Treasury bills and, to a lesser extent, Treasury bills issued by European countries. On the other hand, Canadians reduced their holdings of foreign bonds by a further $2.1 billion on divestment of US government bonds and retirements of Maple bonds. This activity was moderated by Canadian purchases of asset-backed securities issued by European financial institutions.

Canadian and foreign direct investors repatriate funds

Canadian direct investors withdrew $1.3 billion of funds from their foreign affiliates in the third quarter. A large repatriation of funds from foreign affiliates was concentrated in the energy and metallic minerals sector, but was largely offset by Canadian direct investment acquisitions in the United States and the United Kingdom.

Foreign direct investors also repatriated funds from their Canadian affiliates in the third quarter, following a year of significant investment. The $9.2 billion in funds withdrawn from Canada mostly reflected repayments of debt to foreign parents and involved firms in the energy and metallic minerals sector. However, direct investors from the United States continued to inject funds into existing affiliates in Canada, moderating the outflows in the third quarter.