2012.05.31 16:19:54 UPDATE: Canada 1Q Current Account Deficit Widens Less Than Expected

--Goods surplus narrows --Investment income gap narrow, services shortall widens --First net outflow in portfolio investment account since 2008 (Adds economists' comments in paragraphs 7-10, 14-15.) By Nirmala Menon Of DOW JONES NEWSWIRES OTTAWA -(Dow Jones)- Canada's current account deficit widened less than expected in the first quarter as lower exports thinned the goods surplus, which was partly offset by a smaller gap in the investment account balance. The shortfall in the fourth quarter was revised lower on the back of a wider goods surplus. The current account deficit in January through March swelled to C$10.27 billion (US$9.98 billion) from C$9.67 billion in the fourth quarter of 2011, Statistics Canada said Thursday. The latter figure was originally estimated at C$10.33 billion. The consensus call was for the gap to widen to C$10.9 billion in the first quarter, according to a report from Royal Bank of Canada. The current account is the broadest indicator of trade in goods and services. The goods surplus narrowed to C$2.39 billion from C$3.72 billion in the prior period. Exports declined by C$1.3 billion to C$120.21 billion as shipments of precious metals, and machinery and equipment declined. Exports of energy products strengthened on record sales of crude petroleum although natural gas shipments were the lowest since 1997 as prices continued to fall. Natural gas prices declined 40% over the last two quarters. The widening of the current account and thinner goods surplus is "somewhat of a price story rather than a volume story," Mazen Issa, Canada macro strategist at TD Securities, said in an interview. Monthly trade figures indicate that export volumes - which feed into economic growth figures - outpaced imports in the first quarter, so net exports likely contributed positively to gross domestic product in January through March, he said. StatsCan will issue the GDP report Friday. BMO Capital Markets economist Benjamin Reitzes estimated that the first-quarter current account gap represents about 2.3% of GDP, a little wider than in the prior three months, but an improvement over the 2.8% average for last year. "However, given the stiff foreign headwinds and recent drop in commodity prices, some deterioration in the current account is likely in Q2," Reitzes wrote in a report. The services deficit widened to C$6.22 billion from C$6.04 billion as the transportation services gap increased. The deficit on investment income slimmed to C$5.75 billion from C$6.55 billion, reflecting a reduction in income payment flows on foreign investment. There was a net outflow of funds on the portfolio investment account for the first time since 2008 as Canadian investment in foreign securities exceeded foreign investment in Canadian securities. Foreign investment in Canadian securities was the lowest in over three years. StatsCan noted that portfolio inflows had largely contributed to the financing of Canada's current account deficits from 2009 to 2011. Given the current global uncertainty and risk aversion in markets, portfolio flows will likely not provide much support to the Canadian dollar in the current quarter, Reitzes said. Still, according to Issa, foreign investors will likely continue to favor Canada in the longer term because "in an environment plagued with crises and volatility, you want to look to park your cash in a region which is relatively stable and Canada fits the bill." Foreign direct investment in Canada increased to C$14.58 billion from C$3.02 billion in the fourth quarter, primarily a result of mergers and acquisitions in the energy and metallic mineral sector. Canadian direct investment abroad slowed to C$8.50 billion from C$15.75 billion. Website: http://www.statcan.gc.ca -By Nirmala Menon, Dow Jones Newswires; 613-237-0668; nirmala.menon@dowjones.com (END) Dow Jones Newswires May 31, 2012 10:19 ET (14:19 GMT)