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Canada's current account deficit swelled in the third quarter to a record high of $13.12-billion as imports grew faster than exports, pointing to a weaker economic recovery than had been expected.

Statistics Canada said Friday the current account gap rose from an upwardly revised second-quarter deficit of $11.94-billion. It was the fourth consecutive quarterly deficit but was slightly lower than the $13.35-billion shortfall forecast by analysts in a Reuters poll.

Both imports and exports rose after three quarterly declines, but exports continued to fall below traditional levels due to weak U.S. demand, Statscan said.

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"The slowdown in trade continues to play a major role in the Canadian economy, and today's data is the proof-in-the-pudding," said Ian Pollick, economics strategist at TD Securities.

The struggling U.S. consumer, combined with a 9 per cent appreciation of the Canadian dollar against the greenback in the quarter, has hit Canada's huge export sector hard and stunted economic growth. Analysts now predict the economy will barely manage to wriggle out of recession in the third quarter with annualized growth of just 0.6 per cent, much weaker than previously anticipated.

Royal Bank of Canada estimated that weakness in net exports shaved 4.2 percentage points from the quarterly economic growth rate.

The Canadian dollar, which was near a three-week low Friday due to fallout from Dubai's debt woes, firmed slightly to $1.0725 to the U.S. dollar, or 93.24 (U.S.) cents, from $1.0734, or 93.16 cents, before the current account figures were released. Canadian bond prices were little changed.

There was a $3.98-billion deficit in trade in goods in the quarter, the second straight quarterly deficit. The deficit in services dropped slightly from the second quarter to $5.63-billion.

Canada's trade surplus with the United States, which buys about three-quarters of all exports, narrowed for the fifth straight quarter.

"It is unlikely quarterly current account deficits will be able to reverse significantly without a demand recovery from the U.S.," said Derek Holt and Karen Cordes, economists with Scotia Capital.

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Stronger earnings on Canadian direct investment abroad in the third quarter led to a smaller investment income deficit at $2.97-billion.

Economists pointed out that even though the trade deficit rose, details of the report suggested the possible beginnings of a recovery by exporters.

"Today marks a point of departure from the previous trends with the underlying trade flows showing some recovery, speaking to a decent pick-up in cross border activity during the quarter," said Stewart Hall, markets strategist at HSBC Canada.


Analysts say that trend will likely continue as commodity prices climb and U.S. demand for autos gains momentum.

That could take pressure off the Bank of Canada, which has worried that the currency's rise could hamper exports so much that it threatens the economic recovery and delays return to its 2 per cent inflation target.

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The bank has pledged to keep interest rates at a record low of 0.25 per cent until the end of June, unless it needs to act sooner to keep inflation on track.

"With commodity prices continuing to firm and U.S. demand for Canadian auto exports likely to grow as the auto sector gets back on its feet, worries about the impact of the currency's strength are likely to lessen," said Dawn Desjardins, assistant chief economist at Royal Bank of Canada.

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