Source: The Canadian Press

The strong loonie — coupled with a weak American economy — is turning Canada into a global trade loser, raising concerns the country is starting to live beyond its means.

Canada’s trade deficit ballooned to a massive $17.5 billion in the third quarter, Statistics Canada reported Monday, $4.6 billion more than in the previous quarter.

Adding salt to the wound, the agency also revised north the second-quarter deficit to $13 billion from a previously reported $11 billion.

On an annualized basis, Canada’s current account deficit is now tipping above $70 billion — or more than 4% of the country’s gross domestic product — a record in nominal terms and close to the bad days of the 1980s and early 1990s as a percentage of GDP.

“Canada suddenly finds (itself) in the company of countries that have typically been cited as extravagant over-spenders and under-savers,” said Douglas Porter, deputy chief economist with BMO Capital Markets.

“This may prove a passing phase,” he added, “but it is an early warning sign that the country may be living beyond its means.”

In fact, Canada’s annualized trade deficit is now worse than the U.S. in relative terms. The big difference between the two countries is that Canada’s deficit is a recent occurrence, while the U.S. has been running shortfalls for decades.

There’s little doubt the high Canadian dollar, which until last week had been hovering near parity with the U.S. greenback, is the key culprit. The loonie was trading in a narrow range around 98 cents US through most of Monday.

A strong currency not only discourages exports by pricing some Canadian products out of foreign markets, but also attracts imports by making foreign goods cheaper to buy. Canadian firms in particular are taking advantage to ramp up purchases of foreign-made machinery and equipment.

CIBC economist Krishen Rangasamy noted that from 2002, when the loonie began its ascent from a record low of 61.8 cents US, Canada’s share of U.S. imports has been sliced from 20% to the current 15%.

The good news, Rangasamy said, is that the trade deficit likely will lead to a weakening of the loonie, or at least put a ceiling on how far it can rise.

Even at the current slightly depressed level, David Rosenberg of the Gluskin Sheff wealth management firm estimates the loonie is still about five cents above its fundamental value, adding that at the current strength it is clearly impeding the domestic manufacturing sector.

The weaker than expected trade figures don’t bode well for Tuesday’s gross domestic product report. The economists consensus is that the Canadian economy will have braked to 1.4% growth in the third quarter, after advancing 2% in the second and 5.8% in the first.

And analysts say the Canadian trade picture isn’t likely to improve much, as long as the U.S. economy remains on its knees. Three-quarters of Canadian exports still head south, although Asia has been a growing market for resources.

“If the U.S. economy were anywhere near normal, we probably wouldn’t be having this conversation about the trade deficit,” noted Porter.

The latest trade report represents the eighth straight quarterly deficit for Canada, after years of surpluses.

Statistics Canada said stronger imports of goods accounted for the bulk of the increase in the deficit in the third quarter, but exports of goods also weakened.

In the capital and financial account, non-resident investors continued to supply large inflows of funds to the economy through a $28.1-billion investment in Canadian securities, while Canadian investment abroad weakened.

Canadian liabilities to non-residents, mainly in the form of bonds, have increased markedly since the first quarter of 2009.

The overall deficit on international trade in goods expanded by $4.3 billion in the third quarter to $6.5 billion.

As in the previous quarter, the goods surplus with the United States narrowed by about $3 billion in the third quarter, as exports to the United States declined for the first time in five quarters.

Total imports of goods advanced $3.6 billion, with more than half of that increase accounted for by higher volumes of machinery and equipment.