Balancing on a Barrel: Canada’s Second-Quarter Current Account

In the second quarter of 2008, record oil prices outweighed the continuing manufacturing crisis, the worst services deficit ever recorded, and widening deficits in investment income and current transfers.

The Surplus in Perspective

The rise of Canada’s current-account surplus to $6.8 billion in the second quarter is positive news for the Canadian economy.  However, this surplus is still less than last year’s second-quarter surplus of $7.1 billion.  It amounts to little more than half the all-time high of $12.3 billion reached in the fourth quarter of 2005.  (All figures are seasonally adjusted.)

Goods Balance: Shaky Foundations?

The higher current-account surplus was entirely driven by the trade surplus in goods, which increased to $16.4 billion.  This surplus rose because of higher prices for commodity exports, even as the volume of manufactured exports has declined. 

Oil prices peaked in early July and have fallen considerably since then.  Therefore, the second-quarter (April to June) trade surplus reflects the run up in world oil prices to near-peak levels.  However, it is uncertain whether oil prices will remain at these levels in future quarters.

Services Balance: Deepening Deficit

Canada’s trade deficit in services ballooned to $5.9 billion, the largest such deficit ever recorded (since this data was first collected in 1946).  The record deficit results from the overvalued exchange rate, which makes Canadian services uncompetitive in foreign markets and foreign services cheaper to Canadians.

Some commentators have suggested that good jobs lost in manufacturing will be replaced by better jobs in industries producing high-value, tradable services.  Today’s numbers do not bode well for this hypothesis.  Both manufacturing and tradable services have taken a back seat to natural-resource exports.

Canada’s international deficits in investment income and current transfers also deepened to $3.3 billion and $0.4 billion respectively. 

($16.4 – $5.9 – $3.3 – $0.4 = $6.8)

UPDATE (August 29): CanWest coverage in The National Post and other newspapers