OTTAWA — Canada’s trade deficit with other countries grew to $17.5 billion in the third quarter, as a strong dollar encouraged imports and made exports less competitive abroad — raising concerns that the country is living beyond its means.
Statistics Canada reported Monday that the country’s current account deficit widened by $4.6 billion from the previous quarter — a bigger increase than expected.
Adding salt to the wound, the agency also revised upwardly the second quarter deficit estimate to $13 billion from a previously reported $11 billion.
On an annualized basis, Canada’s current account deficit would be a massive $70 billion.
“Canada suddenly finds (itself) in the company of countries that have typically been cited as extravagant over-spenders and under-savers,” said Douglas Porter, deputy chief economist with BMO Capital Markets.
“This may prove a passing phase,” he added, “but it is an early warning sign that the country may be living beyond its means.”
In fact, Canada’s annualized trade deficit — representing over four per cent of gross domestic product — is now worse than the U.S. in relative terms. The big difference between the two countries is that Canada’s deficit is a recent occurrence, while the U.S. has been running shortfalls for decades.
There’s little doubt the high Canadian dollar, which until last week had been hovering near parity with the U.S. greenback, is the key culprit. The loonie was hovering below 98 cents US in Monday morning trading.
The loonie’s attractive value not only discourages exports by making Canadian products more expensive, but also attracts imports by making foreign goods cheaper to buy. Canadian firms in particular are taking advantage to ramp up purchases of foreign-made machinery and equipment.
The Canadian dollar’s strength, coupled with weak U.S. demand due to the crippled buying power of American consumers, has been noticeable on the north-south trade flow.
CIBC economist Krishen Rangasamy noted that from 2002, when the loonie began its ascent from a record low of 61.8 cents US, Canada’s share of U.S. imports has been sliced from 20 per cent to the current 15 per cent.
The good news, Rangasamy said, is that the trade deficit likely will lead to a weakening of the loonie, or at least will put a ceiling on how far it can rise.
Analysts say the Canadian trade picture isn’t likely to improve much, however, as long as the U.S. economy remains on its knees. Three-quarters of Canadian exports still head south, although Asia has been a growing market for resources.
“If the U.S. economy were anywhere near normal, we probably wouldn’t be having this conversation about the trade deficit,” noted Porter.
The latest trade report represents the eighth straight quarterly deficit for Canada, after years of surpluses.
Statistics Canada said stronger imports of goods accounted for the bulk of the increase in the deficit in the third quarter, but exports of goods also weakened.
In the capital and financial account, non-resident investors continued to supply large inflows of funds to the economy through a $28.1-billion investment in Canadian securities, while Canadian investment abroad weakened.
Canadian liabilities to non-residents, mainly in the form of bonds, have increased markedly since the first quarter of 2009.
The overall deficit on international trade in goods expanded by $4.3 billion in the third quarter to $6.5 billion.
As in the previous quarter, the goods surplus with the United States narrowed by about $3 billion in the third quarter, as exports to the United States declined for the first time in five quarters.
Total imports of goods advanced $3.6 billion, with more than half of that increase accounted for by higher volumes of machinery and equipment.