[R-G] Current Account Slips Into Red

[Anthony Fenton]

Current Account Slips Into Red
Strong loonie crimps exports and fuel imports
Jacqueline Thorpe, Financial Post  Published: Saturday, March 01, 2008
http://www.nationalpost.com/todays_paper/story.html?id=344650

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The surge in the loonie has finally cost Canada its elite status as  
the only member of the Group of Seven to hold twin fiscal and current  
account surpluses.

Figures released yesterday show Canada's current account -- the  
broadest measure of trade including goods, services and investment  
income -- slipped into the red in the fourth quarter of 2007 as the  
strong currency crimped exports, fuelled imports and led to a record  
travel deficit. It was the first negative reading since the second  
quarter of 1999.

The balance deteriorated to negative $513-million from a surplus of  
$1.3-billion in the third quarter. For the year as a whole, the  
surplus narrowed to $14.2-billion from $23.6-billion in 2006.

"The impact of the Canadian dollar's long-standing run-up is in clear  
display in this report -- the mighty loonie is carving deeply into  
Canada's net trade performance, with more to come despite record  
commodity prices," Douglas Porter, deputy chief economist at BMO  
Capital Markets, said in a note.

In the capital account, meanwhile -- a measure of investment flows --  
foreign direct investment into Canada surged to a record $115.4- 
billion for the year, surpassing the wave of inward investment  
reached during the technology bubble. Cross-border mergers and  
acquisitions -- including Rio Tinto PLC's US$40-billion purchase of  
Alcan Inc. -- were the catalyst.

Mr. Porter said the inflow, a record 7.5% of GDP, was more than  
double the FDI outflow of $53-billion and a key reason for the  
loonie's surge last year.

"The record net inflow [$62-billion] also makes a mockery of the oft- 
cited assertion Canadian firms are investing as much abroad as  
foreign firms are pouring into Canada."

Within the current account, the trade surplus fell to $9.3-billion in  
the fourth quarter, below the $10-billion mark for the first time  
this decade as exports fell more than imports. The deficit on  
services set another record at $5.8-billion as Canadian used their  
strong loonies to travel abroad while foreigners found Canada too  
expensive. The deficit on investment income was little changed at  
$4.1-billion.

Jacqui Douglas at TD Securities points out that although the Canadian  
current account balance is now in deficit territory, the deficit is  
barely significant as a percentage of GDP, at approximately 0.1%.

"And with the fiscal balance still in positive territory (both on a  
federal and provincial level), Canada does not have any kind of  
savings imbalance to worry about, and economic fundamentals remain  
healthy," she said.

jthorpe at nationalpost.com