8/12/2019 BMO Capital Markets Econofacts

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U.S. Current AccountBalance (Q2)

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September 17, 20088:30 am

Current Account: Rough Past, Brighter FutureThe U.S. current account deficit rose more than expected to $183.1 bln in Q2 (consensus $180 bln),

the highest in a year. The past run-up in oil prices inflated the goods trade gap to its second largestever. Meantime, American investors earned less income on their foreign investments, and foreignersearned more on their U.S. securities (due to widening credit spreads?), thereby shrinking theinvestment income surplus. Working in the opposite direction, the surplus in services rose to a recordhigh, likely reflecting a competitively-priced greenback.

With oil prices down 25% from Q2s average, the trade balance should improve quickly in comingquarters. While current strong export growth will surely slow in the face of slumping global demandand the firmer greenback, imports will soften due to retrenching domestic spending. The real (or price-adjusted) trade balance should continue to improve, though its positive contribution to the currentaccount and economic growth will moderate.

At 5.1% of GDP, the current account shortfall is vastly improved from the unsustainably high 6.6%in late 2005. We see it sliding to a more manageable 3%-to-4% of GDP next year.

($billions : a.r.)08Q2 08Q1 07Q4 2007 2006

Current Account -732.6 -702.6 -669.0 -731.2 -788.1(non-annualized) -183.1 -175.6 -167.2(% of GDP) -5.1 -5.0 -4.8 -5.3 -6.0

Merchandise Trade -865.3 -844.1 -835.7 -819.4 -838.3

Non-Merchandise 132.7 141.6 166.7 88.2 50.2Services 143.1 135.7 140.5 119.1 85.0

Investment Income 109.4 132.8 145.3 81.8 57.2Transfers -119.8 -127.0 -119.1 -112.7 -92.0

The Bottom Line Rising energy costs have prevented a meaningful improvement in U.S. externalbalances to date, but this should turn around quickly unless oil strikes another gusher. An improvingtrade balance will provide some support for the U.S. dollar in coming years. This should help thecountry attract sorely needed capital.

Sal Guatieri, 416-359-5295