Canadian current account balance deficit narrows

Canada's current account deficit narrowed to $17.4 bln ($69.6 bln a.r.) in Q2 from a revised shortfall of $18.1 bln in the prior quarter (previously $17.5 bln). The gap was wider than expected due to the revision to Q1 which remains the second largest on record (on a nominal basis), behind only 2010 Q3. As a share of GDP, the gap in Q2 was around 3.5% of GDP, still a ways from the record 4.7% in 2010 Q3, but still too wide to be viewed as sustainable. However, the current account will likely continue to narrow (even if slowly) driven by the weaker Canadian dollar-though the recent softness in oil prices won't help in the near term.

"The goods deficit narrowed modestly to $6.7 bln or $27 bln annualized, in line with the monthly trade data. Net exports are expected to be a solid positive in Q2, even if GDP is expected to contract due to further big pullbacks in business investment. Meantime, the services deficit narrowed modestly to $5.5 bln, matching the smallest shortfall since late 2011",notes BMO Economics.

The services balance should see meaningful improvement over the coming years as the weaker loonie takes a bite out of the travel and transportation deficits, and Canadian services become more competitive. A smaller investment income deficit in the quarter, driven by higher reinvested earnings, also cut into the non-merchandise shortfall.

Looking at the capital account, foreign direct investment inflows rebounded to $20.4 bln in Q2 from the prior quarter's near-three-year low. Investment was spread among a number of sectors, with commodities seeing the biggest inflow. Portfolio investment inflows slowed to a still-solid $19.8 bln in the quarter, and are a healthy $77.7 bln over the past year.

The foreign buying was concentrated in money market instruments, with a net divestment of bonds (private corporate and provincial government). Meantime, Canadians bought $24.2 bln in foreign securities in Q2, the largest in 8 years, after the prior quarter showed the first divestment since 2009. And, Canadian direct investment abroad surged to $36.9 bln, driven by M&A, with the manufacturing sector accounting for much of the increase.

"Canada's current account deficit narrowed modestly in Q2. While the shortfall remains wide, a weaker loonie and firming U.S. demand should drive a continued narrowing over the next few years",  says BMO Economics.