Hot on the heels of horrible GDP news, Canada’s current account surplus also shrank to a lower-than-expected $9.9 billion ($39.5 billion annualized) in the second quarter, ending the string of sequential record highs.

The decline in the surplus was primarily due to the merchandise trade balance retreating to a surplus of $74.7 billion, down from the first quarter’s all-time high of $86.6 billion.

“With the U.S. slowdown dampening the demand for Canadian goods, it comes as no surprise that exports fell for the first time in four years,” says BMO Nesbitt Burns. “In particular, falling natural gas and power prices, as well as lower volumes, led the decline. A rebound in auto exports, after shrinking for four quarters, could not offset the downdraft. Also contributing to a narrowing of the trade surplus was a bounce-back in imports in Q2. In particular, auto imports were higher, for the first time in a year.”

The investment income deficit widened by $0.5 billion to $7.6 billion, as earnings outflows exceeded inflows, reflecting still stronger profit growth north of the border. The deficit in services narrowed by $0.3 billion, to $1.6 billion.

“Contributing to the decline were smaller deficits in travel and commercial services, potentially reflecting the favourable effects of the cheap loonie,” says CIBC World Markets. “On the capital account side, today’s numbers showed further strong equity outflows, as Canadians continued to invest heavily in foreign stocks in response to the recent easing of RRSP content regulations.”

“While it was still party time for the current account in the second quarter, the news is almost certain to be all downhill from here. We expect the surplus to shrivel in the second half, reflecting a two-pronged hit from falling energy prices to the terms of trade and intensified drag on export volumes from a soft U.S. economy, which seems no closer to recovery.,” says CIBC. “That adds to pressure on the Bank to ratchet up its so-far timid easing program, raising the spectre of tighter Canada-U.S. spreads.”

“A moderation of the current account surplus was expected, but it remains very high by historical standards. Normally, this should provide a fairly solid base for the Canadian dollar, but second quarter GDP, which was released at the same time, will dominate the outlook for the loonie,” concludes BMO.