Canada’s current account deficit widens in Q4, likely to narrow in future on weaker loonie, decent US demand

Current account deficit of Canada widened surprisingly in Q4, reaching $15.4 billion, as compared with the revised deficit of $15.3 billion in Q3. On a quarterly basis, the deficit was narrower than forecast, but on an annual basis, the deficit of $65.7 bln was the biggest in nominal terms. The Q4 deficit was about 3.1% of the GDP, whereas 2015's is expected to be 3.3% of the GDP. The current account deficit is expected to narrow, albeit slowly, mainly due to the weaker Canadian dollar. However, the continuous weakness in oil prices will not be of much help.

Canada's goods deficit narrowed to $4.9 billion or $19.1 billion annualized in Q4, slightly wider than the monthly trade data indicated.  Net exports are likely to contribute positively to Q4, even though the GDP growth is expected to be slightly more than zero. For the entire 2015, the goods deficit reached a record $23.6 bln, more than the $10 bln deficit recorded in 2012, the second worst year.

Meanwhile, the services deficit narrowed moderately to $5.8 billion, the smallest deficit in a year. In the coming years, the services deficit is expected to rebound significantly as the weaker Canadian dollar helps the travel and transportation deficits. The non- merchandise deficit was modestly worsened due to the wider investment income deficit in Q4 and decline in transfers.

Net foreign direct investment inflows in Q4 were almost halved to $11.4 billion, slightly lower than the average pace in the past few years. Net outflows in the manufacturing sector reached ($8.7 bln), countered by inflows of $13.2 bln into management firms. Small inflows elsewhere also counter the outflows in manufacturing sector.

Overall, the moderately narrowing of Canada's current account deficit in Q4 is gradually trending in the correct direction, in spite of reaching a nominal record for the entire 2015. Even if deficits continue to remain wide, a decent demand from the US and a weaker loonie should lead to a continued narrowing in the coming few years.