Shrinking current account deficit points to stronger third-quarter growth

OTTAWA – Canada’s trade and investment deficit with the rest of the world shrank slightly to $15.5 billion in the third quarter, raising hopes for a stronger performance from the overall economy than has been expected.

Statistics Canada attributed the $456 million decline in the current account deficit to smaller negatives in goods and services trade, as well as stronger foreign investment in Canadian markets.

The improvement Canada’s current account deficit was not as much as economists had expected, but that was mostly due to the fact that the second quarter deficit was revised to $15.9 billion, up from the initial estimate of $14.6 billion issued in August.

Canada has been in a negative position on the current account since the 2008-09 recession, with the third quarter deficit running at a still large $61.9 billion annualized rate.

“Canada’s current account gap of just over three per cent of GDP (gross domestic product) is manageable, but continues to suggest the Canadian dollar is overvalued,” said Robert Kavcic, adding that a “stronger U.S. economy and softer loonie should help narrow the gap somewhat in 2014.”

The improvement from the second quarter, however, helped arrest the loonie’s recent slide, at least temporarily. The loonie was up 0.7 cents to 94.45 US following the report and appeared to be holding during the morning.

TD Bank economist Jonathan Bendiner said the new data suggest that the trade drag on the economy during the summer may not have been as significant as thought, leaving open the possibility of a positive surprise Friday when third-quarter GDP numbers are issued.

Some economists say September could show as much as a 0.3 per cent jump in the monthly data with the third quarter coming in at over 2.5 per cent annualized, almost a full point ahead of the Bank of Canada’s most recent forecast.

The third-quarter current account gain was broad-based, Statistics Canada said, comprised of a $300 million improvement in goods as well as services, and a $600 million improvement in investment income flows. Statistics Canada said foreign investment in Canadian securities increased to $16.5 billion in the third quarter, the highest such activity in a year.

Canada’s trade surplus with the United States, this country’s largest trading partner, rose by $1.7 billion, largely accounted for by exports of energy and automotive products.

The trade deficit with countries other than the U.S. expanded to $14.5 billion as exports fell $1.2 billion.