Canada’s current account surplus with the rest of the world grew $3.2 billion to $8 billion on a seasonally adjusted basis in the first quarter.

This was the largest surplus in the last seven quarters. The goods surplus rose $1.9 billion, as imports dropped $1.3 billion. The balance on investment income improved.

The fourth quarter of 2002 was also sharply upwardly revised to $19.5 billion from $13.2 billion.

“The improvement pushes the current account surplus to an estimated 2.7% of GDP from 1.7% in Q4 and an average of 2.0% in 2002,” says Bank of Montreal. “However, it is unlikely the surplus will remain at this elevated level through 2003 for a number or reasons including lower oil price sand the appreciation of the Canadian dollar.”

BMO says that the $12.7 billion jump came from a $7.6 billion improvement in the goods balance, and a $6.5 billion contraction in the investment income deficit. “Much of the improvement in the goods balance was attributed to sharply higher energy exports reflecting the surge in oil and natural gas prices early this year. Hence, as oil prices have dropped significantly this spring a retracement in energy exports can be expected in Q2. Other export categories were generally down in Q1. Ongoing weakness in the US economy and the surge in the Canadian dollar will likely keep overall export growth soft in Q2.”

“Just as the soaring loonie appeared to be losing some serious altitude, along comes an economic report that provides powerful reinforcement of the currency’s solid fundamentals,” comments BMO Nesbitt Burns. It says that the big surprise in today’s report was the narrowing of the deficit on investment income. “Some of the sharp drop in the investment income deficit reflected a pullback in dividend outflows, which is likely to prove temporary. A more positive development was a big decline in net interest payments, which StatsCan attributes to a decline in “the cost of interest payable in US dollars”. In other words, the first-round impact of the soaring loonie has actually strengthened the balance of payments.”

However, Nesbitt says that today’s current account surplus likely marks the high-water level for this year. “The combination of lower oil prices, still-soft U.S. demand, and the gradual impact on export volumes of the robust loonie will carve into the trade surplus. We look for a full-year current account surplus of just over $20 billion this year and $10 billion next year versus $23.4 billion in 2002.”

Also, CIBC World Markets points out that a SARS-induced falloff in tourism will have a much more materially negative impact in Q2. “While an undoubtedly strong start to the year, Canada‚s current account surplus faces near-term hurdles. Energy prices, which featured prominently in the Q1 improvement, have since reversed course, taking some air out of merchandise exports. Moreover, SARS fears have dealt a blow to Canada‚s tourism sector, with fewer visits by foreigners increasing the travel deficit.”

“This is an impressive report, with Canada’s solid balance-of-payments on clear display,” concludes BMO Nesbitt. “A combination of factors will cut the surplus going forward, but the smaller shortfall on investment income flows is very good news indeed.”