The Current Account Deficit
Statistics Canada revealed today that, in the fourth quarter of 2007, we ran a current account deficit for the first time since 1999.
It is difficult to get a handle on what pushed us into deficit because the raw and seasonally-adjusted numbers paint quite different pictures of quarterly changes. The raw numbers indicate that, from the third to the fourth quarter, service exports tanked and goods exports barely changed. However, as we move into winter, it is normal for service exports (e.g. tourism to Canada) to fall and goods exports to rise. Therefore, the seasonally-adjusted numbers indicate that goods exports tanked and service exports barely changed.
To get around the seasonality problem, I have compared the fourth quarter of 2007 with the fourth quarter of 2006 (due to rounding, the numbers do not sum perfectly):
Canada’s Current Account, Abridged
($ billions)
| Â |
 4Q2006 |
 4Q2007 |
 Change |
|
 Goods Exports |
 $115.1 |
 $111.4 |
 ($3.7) |
|
 Service Exports |
 $ 15.6 |
 $ 15.9 |
 $ 0.3 |
|
 Investment Receipts |
 $ 17.1 |
 $ 15.6 |
 ($1.5) |
|
 Goods Imports |
 $102.2 |
 $101.9 |
 $0.3 |
|
 Service Imports |
 $ 20.2 |
 $21.7 |
 ($1.5) |
|
 Investment Payments |
 $19.9 |
 $20.1 |
 ($0.2) |
|
 Balance |
 $5.2 |
 ($0.4) |
 ($5.6) |
These figures suggest that, over the course of 2007, Canada’s service exports, goods imports, and payments to foreign investors basically remained constant. Our longstanding current account surplus turned into a deficit because we exported fewer goods, imported more services, and received less return on our investments abroad.
At the same time, the more volatile capital account swung into surplus. Again comparing the fourth quarters, foreign investment in Canada rose faster than Canadian investments abroad. The most notable change was that foreign direct investment surged to $47.0 billion – an eye-popping sell-off of Canadian assets. In the fourth quarter of 2007, foreigners took-over 42 cents of assets in Canada for every dollar of goods bought from Canada.
These figures are a striking confirmation of the argument that the rise of the Canadian dollar is NOT being driven by an improved trade performance – to the contrary, the high dollar has pushed us into a current account deficit for the first time since 1999. The driver of the dollar in 2007 was an unprecedented inflow of $115 Billion of foreign capital to finance mergers and acquisitions, mainly in the resource sector.
Given the rate of appreciation it would make sense that the driver of the dollar in terms of components of original causality would indeed be this inflow of capital for the huge M&A activities of 06′ and ’07. However, to what degree did auxilary pressures come from plain old speculative pressure, once this original M&A pressure kicked in. This in one sense is similar to the “Dutch disease”, but given the dynamics that Andrew is pointing out, potentially the M&A pressures could be somekind of homegrown “Canadian disease”. I am not sure if this occurred with the Dutch or not.
I would still argue that if the BOC would have been on top of this with an interventionist stance, they could have quelled a good proportion of the auxiliary speculative pressures on the dollar and taken a large bite out of the appreciation. At one point in ’07 when the dollar was at a 1.10, it is clear the speculative powers had over-run any rational motivation for upwards pressure on the dollar. And it is also quite clear that the Harper government in the summer of ’07 could have started signaling to the BOC that a interventionist stance should be commenced. Finally with the meager tinkering of the last couple of rate cuts, it is abundantly clear that the Harper government are ideologues.
Sure a majority of the numbers at the time were not signaling anything is wrong with the economy. The key numbers however and it does not take a rocket scientist to connect the dots, out of the manufacturing and forestry sectors, whose combined economic totals far outweigh any other sector in original wealth creation, were in recessionary territory. Adding onto that is the service sector, like the hospitality industries have clearly been effected by the run up in the dollar.
Wait until next quarter the red will be flowing quite dramatically. If we don’t get a reprieve soon from the Harper economic policies, we’ll all be soon joining the exodus and moving to Alberta.
I would lay some pretty good cash on the Harper government trying to pass some quite questionable legislation in the coming weeks, all in an attempt to force the opposition parties into a non-confidence motion and forcing an election.
pt