May 29, 2009 / 12:46 PM / 9 years ago

Canada's current account deficit hits record high

OTTAWA (Reuters) - The worst recession in the post-war era has pushed Canada into a record current account deficit and triggered the first annual budget deficit after an 11-year run of surpluses, reports showed on Friday.

The current account deficit reached C$9.06 billion ($8.24 billion) in the quarter as the global recession pulled Canada’s goods surplus to a 31-year low, Statistics Canada said.

The deficit was the biggest since the federal statistical agency began collecting data in 1946, but it was below the C$10.5 billion shortfall forecast by analysts in a Reuters poll and therefore did nothing to slow a rally by the Canadian dollar.

It was the second straight quarter of current account deficits after nearly a decade of surpluses.

Statscan revised the fourth-quarter current account deficit to C$7.76 billion from C$7.49 billion.

“This is categorically a weak report and highlights the damage that the deteriorating trade environment has had on the Canadian accounts,” said Charmaine Buskas, senior economics strategist at TD Securities.

“This is unlikely to change significantly in the near term and suggests that the days of the well-entrenched twin (current account and budget) surpluses are in the rearview mirror,” she said in a note.


The Finance Department also reported on Friday a preliminary budget deficit of C$2.25 billion ($2.05 billion) in 2008-09, twice the amount it had forecast earlier this year, as the recession caused tax revenues to dwindle.

The deficit is subject to revisions in coming months. It comes after Finance Minister Jim Flaherty sparked a political uproar by raising his estimate of the current fiscal year’s deficit to a historic high of over C$50 billion.

The news means Canada loses its prized status from the past decade as the only Group of Seven industrialized nation with “twin surpluses”.

The Canadian dollar, charging higher on rising commodity prices and a weak greenback -- hit its highest level in almost eight months at C$1.0950 to the U.S. dollar, or 91.32 U.S. cents, on Friday morning. The currency had closed at C$1.1148 to the U.S. dollar, or 89.70 U.S. cents, on Thursday.

“In today’s environment, it is unlikely that a continued widening in the current account deficit is going to take the bloom off the Canadian dollar rise, which has benefited significantly from overall sentiment moving clear of the safety and liquidity offered by the greenback and instead begun looking at returns,” said Stewart Hall, markets strategist at HSBC Canada.

Exports tumbled in the first quarter, outpacing the decline in imports, so that the trade surplus for goods dwindled to just C$845 million, a level not seen since 1978. The United States buys three-quarters of Canadian exports.

Automotive and energy shipments were the worst hit. Auto product exports sank to their lowest level in 16 years, while energy exports have been cut in half over the past two quarters, Statscan said.

The deficit in services was unchanged at C$6.12 billion while the deficit in investment income narrowed to C$3.32 billion from C$5.13 billion as foreign companies repatriated less in profits.

Even though current account deficits may persist for a while, the first quarter is seen as the weakest point, said Derek Holt and Karen Cordes, economists at Scotia Capital.

“This magnitude of an overall current account deficit won’t stick for long,” they said in a note.

Reporting by Louise Egan; editing by Rob Wilson

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