August 30, 2012 / 12:47 PM / in 5 years

Canada current account deficit jumps more than expected

OTTAWA (Reuters) - Canada’s current account deficit jumped by a bigger-than-expected 57.8 percent in the second quarter, hurt by the country’s deteriorating trade performance, a trend analysts said could undermine the Canadian dollar.

Statistics Canada, citing lower exports of energy and a higher level of imports, said on Thursday that the deficit grew to C$16.02 billion ($16.18 billion) from a revised C$10.15 billion in this year’s first quarter. It was the largest quarterly deficit in nearly two years.

Analysts had been expecting a deficit of C$15.30 billion in the current account, which measures the flow of goods, services and investments in and out of the country.

The deficit on trade in goods in the second quarter was C$3.60 billion, following three quarters of surpluses, as crude petroleum exports to the United States fell and imports rose.

The overall services deficit edged down to C$6.22 billion from C$6.44 billion, while the deficit on investment income grew to C$5.53 billion from C$5.38 billion as profits earned by Canadians on their direct investment abroad declined.

LONG-TERM CONCERN FOR C$

The data had little immediate impact on the Canadian dollar, which had weakened against the U.S. dollar early on Thursday due to uncertainty over central bank action to stimulate the global economy.

But analysts said the prospect of more current account deficits to come was a potential long-term negative for the currency.

“The acute worsening in the current account deficit ... to roughly 3.6 percent of GDP in the second quarter serves as a reminder that the currency’s strength is mainly due to capital (rather than trade-related) flows -- leaving the currency vulnerable to capital flight if renewed global fears emerge,” said Emanuella Enenajor of CIBC World Markets.

Canada recovered better from the global financial crisis than other major Western economies and has maintained its top-notch credit rating. This has triggered capital inflows, which have helped boost the value of the Canadian dollar to a recent 3-1/2 month high.

Foreign investors acquired C$28.38 billion in Canadian securities in the second quarter, up from just C$6.05 billion in the first quarter. Canadian investment in foreign securities dropped to C$2.63 billion from C$6.45 billion.

Douglas Porter, deputy chief economist at BMO Capital markets, said the current account deficit looked set to persist for some time, given weak U.S. growth, an uncertain world economy and flat commodity prices.

“The growing gap simply adds further evidence that the Canadian dollar is becoming too strong for comfort ... point the finger squarely at the Canadian dollar above parity,” he said in a note to clients.

RELIANT ON EXPORTS

Canada is heavily reliant on exports, which in 2011 accounted for around 31 percent of GDP, and the current account figures reflect tough international markets for Canadian firms.

Canadian manufacturers complain the strong dollar, increased foreign competition and the weak state of the world economy makes it harder for them to compete.

The goods surplus with the United States slumped to C$9.89 billion from C$15.43 billion, the lowest since the fourth quarter of 2010. The United States takes around 73 percent of all Canadian exports every month.

“The widening in the current account deficit, particularly in the goods account, underscores our expectation that net exports will exert a drag on second quarter GDP,” said TD Securities strategist Mazen Issa in a note to clients.

Canada releases its data for second quarter GDP on Friday and markets are expecting unimpressive growth of 1.6 percent at an annualized rate. The Bank of Canada last month predicted 1.8 percent growth for the second quarter.

($1=$0.99 Canadian)

Editing by Jeffrey Hodgson and Peter Galloway

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