Current Account: 2008 vs. 1999

Initial reports of this morning’s current account deficit emphasize that the fourth quarter of 2008 was the first such deficit since the second quarter of 1999.

While correct, this historical comparison overlooks a crucial difference. Canada’s balance of investment income has always been negative. In the second quarter of 1999 and most previous quarters, Canada’s trade surplus was not large enough to fully offset this investment income deficit. In the fourth quarter of 2008, we actually ran a trade deficit in addition to our usual investment income deficit. As a result, the total current account deficit was far larger last quarter than was common in the late 1990s.

Canada’s Current Account Balance ($ millions)

 

Â	Second 1999	Fourth 2008
Goods and Services	 $7,525	 ($2,597)
Investment Income	 ($8,707)	 ($5,963)
Current Transfers	 $327	 $596
Total	 ($855)	 ($7,964)

 

One must go back to the first quarter of 1994 for Canada’s last trade deficit. This deficit resulted from Canada’s merchandise-trade surplus not being large enough to offset our service-trade deficit. However, as Statistics Canada reported earlier this month, Canada also ran a merchandise-trade deficit in December 2008 for the first time since 1976.

The closer one looks, the worse these numbers appear!