OTTAWA - Canada's trade record with the rest of the world fell into negative territory for the first time in nine years at the end of 2007, signalling that a long run of muscular trade surpluses is over.
The combination of the high Canadian dollar, low consumer demand in the United States, low domestic prices for foreign goods and a flood of cross-border bargain hunters chopped the current account by $1.8 billion, compared with the third quarter, for a net deficit of $513 million.
"I think we're seeing a shift in the trade balance that's going to be with us for a few years,'' BMO deputy chief economist Douglas Porter said Friday.
"And for one of the few times in decades, we may see an overall merchandise deficit. We're more than halfway there from the peak levels.''
For the full year, Canada's current account -- the broadest measure of international trade -- still registered a $14.2-billion surplus, down from $23.6 billion in 2006.
But many economists are predicting 2008 will only see red ink, with the deficit reaching as high as $20 billion.
The new sign of growing economic weakness will likely cause new Bank of Canada governor Mark Carney to make his move on interest rates a dramatic one Tuesday and slash the overnight rate by half a percentage point to 3.5 per cent, said CIBC economist Krishen Rangasamy.
The news also curbed the recent runup by the Canadian dollar as it slipped almost half a cent to 101.96 cents US by midday.
"The Bank of Canada has to react to this,'' said Rangasamy. "A 50-basis-point reduction would stimulate the economy by reducing the cost of borrowing, which encourages investment and spending.''
Most of the major indicators that go into the current account numbers suffered setbacks in December, Statistics Canada said.
The normally strong goods surplus continued to fall as exports, particularly to the U.S., dropped for the third-straight quarter to $9.3 billion. Meanwhile, Canada's traditional deficit in services grew to $5.8 billion.
"This is consistent with the trade sector acting as a restraint on gross domestic product growth again in the fourth quarter,'' said RBC's Dawn Desjardins. "We expect that the real net exports trimmed the quarterly growth rate by about 2.6 percentage points in the quarter.''
In addition, foreign firms continue to grab Canadian assets, particularly in the desirable resource sector. Direct inflows surged to $47 billion in the fourth quarter, making last year's total inflows of $115.4 billion even larger than during the tech bubble of 2000.
"This certainly raises some serious questions about whether hollowing-out is a myth after all,'' said Porter. "We've seen cash-rich companies snap up whatever they could in the resource sector even though the Canadian dollar is very high.''
But Porter added that Canada's deteriorating trade balance should be put in perspective with the U.S., which is paying a steep price for many years of trade deficits.
"Even if our deficit rose to $20 billion, which is quite possible, that would only be a little more than one per cent of GDP, whereas the United States has come off a string of years when their deficit has been five or six per cent of GDP,'' he noted. "We're a long way from the U.S. situation.''
Statistics Canada said the country's travel deficit also hit a record in the fourth quarter, as the strong loonie helped send Canadians to the U.S. -- both for vacations and for short shopping expeditions.
