November 28, 2008 / 4:39 PM / 9 years ago

Current account narrows in third quarter

OTTAWA (Reuters) - Canada posted a current account surplus in the third quarter for what analysts expect to be the last time in a while as exports sagged and domestic companies earned lower profits on their investments abroad.

Statistics Canada said on Friday the surplus narrowed to C$5.64 billion ($4.55 billion) from C$8.21 billion in the second quarter. Analysts had forecast a surplus of C$5.1 billion.

A separate report by Statscan on industrial and raw materials prices showed the weaker Canadian dollar was mitigating potential deflationary pressure in October.

Economists predicted the worsening U.S. and global economic downturn and tumbling commodity prices would drive the current account surplus into the red in coming quarters.

“Canada managed to grind out another current account surplus, but this will likely be the last hurrah on our external balance,” Krishen Rangasamy, an economist at CIBC World Markets said in a note.

Sky-high commodity prices earlier in the year compensated for the weaker volumes. But prices for oil and metals have since tumbled in the global economic slowdown.

“We look for the current account to struggle to stay in the black in Q4, and expect a C$10 billion deficit (or more) in 2009,” said Doug Porter, deputy chief economist at BMO Capital Markets.

The Canadian dollar fell on Friday but the focus was not on the economic data but a political crisis sparked by the Conservative government’s fiscal and economic report on Thursday.

EXPORTS WEAKENED

Canadian exports weakened in the third quarter, ended September 30, and the goods surplus narrowed to C$15.2 billion from C$16.2 billion in the previous quarter. Import growth outpaced export growth in the period.

The deficit in investment income grew to C$1.8 billion in the third quarter from C$2.0 billion in the second. Profits earned on Canadian foreign direct investments fell, Statscan said.

Foreign direct investment by Canadians surged in the quarter, contributing to the deficit. Scotia Capital economists Derek Holt and Karen Cordes attributed the trend to finance and insurance companies funding their U.S. subsidiaries.

“This is consistent with fewer funding pressures in Canada than the U.S., and stronger Canadian capital positions that are being used to float U.S. subsidiaries,” they said.

OCTOBER INDUSTRIAL PRICES

In October, Canadian industrial prices were unchanged in October as exporters were shielded by a sharp depreciation of the Canadian dollar, which offset plunging energy prices.

Raw materials prices fell 12.5 percent, as expected, as a result of the sharp decline in mineral fuels prices.

Analysts in a Reuters survey had forecast a 1.2 percent decline in industrial product prices in the month.

Prices for petroleum and coal products tumbled 13.8 percent in October. However, the Canadian dollar lost 12 percent of its value against the U.S. dollar in the same period, the biggest drop since 1950, having the effect of neutralizing price swings for exporters who are paid in U.S. dollars.

The biggest contributor to the decline in raw materials prices was mineral fuels, which sank 18.7 percent in the month.

Year-on-year, industrial prices gained 9.5 percent while raw materials prices declined 0.2 percent.

Reporting by Louise Egan; editing by Rob Wilson

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