Saturday, November 29, 2008

Canada May Finally See a Deficit

The Star (Toronto) - Canadian Exporters' Golden Era May Be Over
Bloomberg - Canada Current Account Surplus Narrows on Less Profit

Canadian current account surpluses are expected to dip into deficits in the last quarter of 2008 and in 2009. A country's current account balance is a broad measure of trade flows in and out of a country, including goods, services, investment, and profits. Canada has run a current account surplus since 1999 based on a high volume of exports, high commodities prices, and investment income earned abroad and repatriated by Canadian companies. The Canadian economy contrasts with the United States economy, where there has been a consistently large current account deficit in recent years.

Canada's current account surplus shrank from C$8.2 billion in the second quarter to C$5.6 billion in third quarter. Canadian exports have slowed the past few years, but the current account surplus has been buoyed by high commodities prices. Now that prices of commodities such as oil are tumbling, the Canadian goods surplus is falling. The global economic crisis has slowed demand for exports, especially in the U.S., Canada's biggest trading partner. Foreign earnings by Canadian companies fell to C$8.8 billion while its foreign investment deficit doubled to C$3.8 billion.

Canada's exports depend heavily on commodities such as oil, natural gas, and metals. These goods' prices have crashed in 2008. One economist forecasts an C$8.5 billion current account deficit for Canada in 2009.

Other recent Canadian economic indicators have been similarly negative. The country's economy is expected to shrink 1 percent in the last quarter of 2008 and 0.4 percent in the first quarter of 2009. The Canadian dollar, worth more than the U.S. dollar at times within the past year, has dropped to 81 cents on the U.S. dollar.

1. What are the long-term economic consequences of running a current account deficit?
2. Which would be expected to decline more during the global economic crisis, Canadian exports or foreign investment profits?

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