Canada: Balance of international payments, Q4 2018

Canada’s current account deficit (on a seasonally adjusted basis) expanded by $5.4 billion in the fourth quarter to $15.5 billion. This increase reflected a higher trade in goods and services deficit, which was moderated by a lower investment income deficit.

The deficit on trade in goods and services rose by $6.1 billion. Exports were down by $7.3 billion to $175.1 billion, mainly on lower sales of energy products. This reflects a sharp decline in energy prices, which were down 22% in the quarter. Imports of goods and services declined by $1.1 billion to $188.5 billion. The deficit on primary income was reduced by $0.7 billion to $1.5 billion. Revenues earned by Canadians investors on their foreign assets were up in the quarter.

Inflows of funds from abroad to finance the current account deficit mainly came from transactions in currency and deposits. These transactions generated a net inflow of $38.6 billion, as non-residents significantly increased their holdings of currency and deposits in Canada.

Direct investment generated a net inflow of funds totalling $3.9 billion, as direct investment in Canada exceeded direct investment abroad for the first time in three quarters. These inflows of funds were partially offset by a strong decline in foreign holdings of Canadian debt securities.

In 2018, the current account deficit narrowed by $1.4 billion to $58.7 billion, the lowest deficit in four years. The trade in goods deficit declined by $3.1 billion, while the investment income deficit increased by $2.3 billion. The current account deficit has now declined for three consecutive years, from a peak of $70.5 billion in 2015.

Current account

Trade in goods deficit up sharply in the fourth quarter

After reaching a record $152.2 billion in the third quarter, exports of goods were down by $7.8 billion in the fourth quarter. Energy products accounted for most of the reduction in the value of exports, notably crude petroleum (down $7.5 billion). Crude petroleum prices declined nearly 50% in the last two months of the quarter. Higher exports of natural gas moderated the overall reduction in energy product exports.

Imports of goods were down by $1.5 billion in the fourth quarter. Energy products, basic and industrial chemical, plastic and rubber products, and motor vehicles and parts all contracted by $0.6 billion. Lower volumes imported were the main contributor to these decreases, except energy product imports, which declined on lower prices.

The trade in services deficit was down $0.2 billion to $6.2 billion in the fourth quarter, led by a higher commercial services surplus.

Lower deficit on investment income

The deficit on investment income declined by $0.7 billion to $0.9 billion in the fourth quarter. Profits earned by residents on their direct investment abroad increased by $1.2 billion to a record $19.0 billion. Meanwhile, profits earned by non-residents on their direct investment in Canada edged down for a second quarter in a row.

Financial account

Foreign holdings of Canadian securities decline for the first time since the end of 2008

Foreign investors reduced their holdings of Canadian securities by $4.8 billion in the fourth quarter, compared with a $26.0 billion investment in the previous quarter. Non-residents invested in Canadian shares, but significantly reduced their holdings of debt securities. This was the first divestment in Canadian securities since the fourth quarter of 2008.

Foreign holdings of Canadian bonds were down by a record $12.9 billion in the fourth quarter, led by strong divestments in December. Retirements of corporate bonds and sales of federal government bonds on the secondary market contributed the most to the decline. The Canadian dollar depreciated by 4.0 US cents against the US dollar in the quarter.

Direct investment in Canada exceeds direct investment abroad

Direct investment in Canada totalled $17.2 billion in the fourth quarter, the highest since the third quarter of 2015. Equity investments made by foreign parents in Canadian affiliates accounted for all of the activity in the quarter. Overall, direct investment in Canada was primarily from the United States and, to a lesser extent, France. Mergers and acquisitions activity totalled $5.9 billion, entirely on transactions from countries other than the United States.

Direct investment abroad slowed to $13.3 billion in the fourth quarter. About three-quarters of this activity was in the trade and transportation sector. Mergers and acquisitions activity totalled $4.5 billion, down from $17.7 billion in the third quarter. Canadian acquisitions of foreign firms ($16.0 billion) in the fourth quarter were moderated by sales of existing interest abroad ($11.4 billion). Issuances of new Canadian shares to non-resident portfolio investors partly contributed to the financing of the acquisition activity.


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Dean Popplewell

Dean Popplewell

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