Tuesday, September 8, 2015

Canada's Current Account and the Real State of the Canadian Economy

Updated February 2016

While the current account statistic gets far less coverage than unemployment, housing prices and inflation, it is a key barometer of the health of the Canadian economy.

This non-headline gathering statistic is calculated as:

the sum of the balance of trade (i.e. exports minus imports), net factor income (including interest and dividends) and net transfer payments (including foreign aid).

In other words, the current account is a broad measure of trade in goods, services and investments between Canada and the rest of the world.

In Canada's case, total receipts and payments include the following categories:

1.) Goods and Services which includes services like travel and transportation.
2.) Primary Income which includes compensation of employees and investment income.
3.) Secondary Income which includes both private and government transfers.

Most of the receipts ($624.311 billion of the $721.478 billion in 2014) fall under the goods and services category.  As well, most of the payments ($642.309 billion of the $762.958 billion in 2014) fall under the goods and services category.

The annual statistics for the past five calendar years can be found here or you can simply look at the summary found on this table:

In the first quarter of 2015, Canada's current account ran a deficit of $18.145 billion (the second highest on record) and in the second quarter, the current account ran a deficit of $17.398 billion, the two highest quarters since the third quarter of 2010 when the current account deficit hit $19.565 billion, the highest level since 1946

As we can see, over the past five years, Canada has run a current account deficit.  This was not always the case.  Here is a graph from Trading Economics which shows a longer timeframe going back to 1946:

Over the period from 1946 to 2015, Canada's current account has ranged from a high of $12.223 billion to the aforementioned low of -$19.565 billion.

If we focus on the past 10 to 15 years, we can see that Canada had a current account surplus until the fourth quarter of 2008 when the Great Recession took hold:

Since then, Canada has run a long string of current account deficits that have all been significantly higher than the deficits of the 1970s, 1980s and 1990s.  A great deal of the current account deficit can be attributed to two things; weak oil prices (most recently) and a long decline in Canada's manufacturing sector.

Historically, Canada has relied on exports of natural resources, energy and manufacturing as the engine for economic growth.  The current account deficit represents a drain on our economy.  The current account deficit of $41.480 billion in 2014 represented 2.3 percent of GDP.  This implies that, in order just to "stand still", the Canadian economy has to grow 2.3 percent faster.  If the $41.48 billion was added to the Canadian economy, perhaps it would be easier to believe Stephen Harper when he used to tout the Canadian economic advantage.

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