Canadian Current Account Widens on Higher Commodity Prices

June 2, 2008

From the standpoint of economic growth, net foreign demand depressed Canadian real GDP by 1.5 percentage points in the year to 1Q08, reflecting previous excessive appreciation in the Canadian dollar and soft U.S. demand, especially for Canadian lumber and motor vehicles and auto parts. But the current account surplus last quarter revived sharply to 1.4% of GDP from 0.3% in 2H07. The surplus had equalled 1.4% of GDP in 2006 and 1.5% of such in 1H07. Higher commodity prices particularly for energy lifted the merchandise trade surplus to 3.4% of GDP last quarter, which was mitigated by deficits in net investment income and net services.

The dark side of the commodity price boom is that, as in other economies, domestic inflation has accelerated sharply. Canada’s GDP deflator rose 5.2% at an annualized rate in 1Q08, up from a 3.8% pace in 4Q07. Producer prices salred 16.4% saar during the first third of 2008.

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