Global impact felt as Canada's trade deficit expands
Published Thursday, May 31, 2012 12:35PM EDT
OTTAWA - Canada's total trade deficit widened by $600 million to $10.3 billion in the first quarter in a fresh indication the worsening conditions around the world are taking a toll on the economy.
The current account deficit, which includes merchandise, services and investment activities with the rest of the world, was actually slightly better than predicted.
But economists note Canada appears to be making little headway in eliminating the overall deficit, which appeared during the recession and is now running at an annualized $41.1 billion, or 2.3 per cent of gross domestic product.
And news coming from the global economy suggest the current account deficit may widen in the second quarter.
"Globally things are worsening meaningfully," said Benjamin Reitzes, a senior economist with BMO Capital Markets.
He said it's going to be tough for Canada to pull out of its current account deficit until the global economy picks up.
March's deficit was due to a smaller merchandise trade surplus, as previously reported, combined with a larger services deficit.
Thursday saw little to cheer about on the global front.
In the U.S., Canada's largest trading partner by far, the labour department reported weekly applications for unemployment benefits rose for the fourth straight time. Meanwhile, a private-sector survey showed hiring in May added a mere 133,000 jobs.
Also on Thursday, the U.S. Commerce Department said the American economy's growth rate in the first quarter was only 1.9 per cent, not the 2.2 per cent initially reported.
Canada announces its first quarter report on gross domestic product on Friday and economists are almost united that the Bank of Canada forecast of a 2.5 per cent boost will not be met. The consensus is for a 1.9 per cent increase, matching the modest expansion in the U.S.
"Looking ahead, the current account deficit could widen further in the second quarter on a weaker trade picture, and we have already seen the sentiment shift in Q2 as uncertainty about Europe increases flight-to-safety flows," said TD Bank economist Leslie Preston.
Analysts say that Europe remains the wild-card in the global picture.
The Bank of Canada has long considered it the No. 1 risk to the global recovery, although it recently downgraded the situation from crisis to chronic.
That view has likely changed, however, and may be reflected in the central bank's upcoming interest rate statement on Tuesday. Greece appears to be lurching toward insolvency and a possible exit from the euro, while attention has now turned to Spain's under-capitalized banking sector.
In a far from rosy assessment, European Central Bank head Mario Draghi warned EU leaders that the current operating framework of the 17-country currency union was unsustainable.
And he said national regulators are making the situation worse by not coming clean about the state of the banking sector in troubled countries, citing the recent bailout of Bankia in Spain, and before that Dexia in Belgium.
"What Dexia shows -- and Bankia shows as well -- is that whenever we are confronted with the dramatic need to recapitalize, if you look back, the reaction of the national supervisors... is to underestimate the problem, then come out with a first assessment, a second, a third, fourth," he said.
"That is the worst possible way of doing things, because everybody ends up doing the right thing but at the highest possible cost and price."
Finance Minister Jim Flaherty has been vocal in calling on European authorities to "overwhelm" the problem with a massive bailout -- as the U.S. did in 2008 -- rather than try to put out fires as they appear piecemeal.