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Canada current account gap widens as exports sag

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Canada's current account deficit grew by more than half in the second quarter of 2011, further underlining how growth has stalled amid falling exports to the crucial U.S. market.

Statistics Canada said on Tuesday that the deficit had ballooned to $15.33 billion from a revised $10.07 billion in the previous quarter. Markets had expected a shortfall of $13.75 billion.

Statscan will release second-quarter GDP figures on Wednesday that are expected to show a mere 0.1 percent growth on an annualized basis.

A key reason for the slowdown is weaker exports, a factor that played a major part in the larger current account deficit. The overall balance of trade in goods slumped to a deficit of $3.50 billion from a surplus of $1.80 billion in the first quarter.

"After a decade of current account surpluses, Canada now finds itself mired in deficit territory with no relief in sight," said Benjamin Reitzes of BMO Financial Group.

"The strong Canadian dollar combined with weak U.S. demand means that deficits could be the norm through at least 2012. Over the medium term, such a persistent shortfall suggests the (Canadian dollar) is likely overvalued," Reitzes said.

The goods trade surplus with the United States, Canada's main trading partner, dropped to $11.12 billion from $14.43 billion on lower exports of crude petroleum and automobiles.

The services deficit hit a new high of $6.25 billion, in part because Canadians' spending abroad outpaced spending in Canada by foreigners. Canadians also spent more money with foreign airlines than in the first quarter.

The deficit on investment income narrowed by to $4.73 billion from $5.17 billion as Canadian direct investors' earnings from abroad rose.

"The deterioration in the current account balance is not altogether surprising, given the combination of slower global growth and continued momentum within Canada's domestic economy," said David Tulk, a strategist at TD Securities.

Tulk predicted that slower growth meant the Bank of Canada would not raise interest rates until well into the first half of 2012 at the earliest.

A Reuters poll of primary security dealers on Aug. 19 showed most felt the central bank would next raise rates in 2012.

In another sign of the pressures on the economy, Statscan said producer prices dropped by 0.3 percent in July from June-the third consecutive monthly decline-on lower prices for chemicals and motor vehicles.

Raw material prices were also down for the third month in a row, dropping 1.2 percent in July from June on a 2.2 percent fall in prices for mineral fuels.

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