OTTAWA - Canada is entering a period of double deficits in its fiscal and current accounts, but it is the re-emergence of what many would consider good news -- the high-flying loonie -- that poses the newest threat to the economy.
The Canadian currency rose close to two cents Friday morning to soar past the 91 cent US level for the first time since October, blithely oblivious to the economic wreckage piling up around it.
Economists, including the Bank of Canada, widely expect Statistics Canada will record Monday that Canada's economy fell back by more than seven per cent in the first three months of 2009, the worst retreat since the Great Depression and more than the 5.7 per cent contraction reported in the United States.
On Friday, the economy got two new shocks, although none came as a surprise.
The federal government ushered in a new era of multi-year deficits reporting it was short $3.6 billion in March, and ended the 2008-09 fiscal with the first deficit in a dozen years with an estimated $2.2-billion shortfall.
And the deficits are set to mount, to $50 billion and above for the current fiscal year ending next March 31, according to Finance Minister Jim Flaherty's latest projection.
The current account deficit -- which measures transactions in goods and services with the rest of the world -- also ballooned to a nominal record of $9.1-billion in the first quarter of 2009 after years of surpluses, reflecting the collapse of commodity prices and slower trade caused by the recession.
Such a sharp drop-off would normally result in selling pressure on the loonie, as would Flaherty's $50-billion deficit shock, but the currency has been riding a winning streak that has seen it rise about eight cents in the month.
That's because of high commodity prices for oil and minerals propping up the value of the loonie, seen as a commodity currency, and the weak American dollar, making the Canadian dollar more attractive by comparison.
The TD Bank chief economist says the loonie will likely return to parity with the sinking U.S. greenbacks by the end of the year.
The trouble with that scenario is that a strong loonie is the last thing the struggling Canadian economy needs since it prices many Canadian exports out of world markets.
"This is problematic for the Bank of Canada, which wants monetary conditions to be high stimulative," said Avery Shenfeld, chief economist with CIBC World Markets.
"If this currency rally persists, and is not accompanied by an equivalent rally in our export prospects, the bank could step in by selling the Canadian dollar.
"That's a weapon that's been gathering rust, not having been used for many years, and the bank will be reluctant to do that," he added.
But it may be the only weapon on hand. In normal times, the central bank would cut interest rates to trim the loonie's wings, but with the policy rate already at the practical low of 0.25 per cent, it can't cut rates further.
In a research paper, economist Dale Orr said the dollar often moves whenever increased global growth drive up demand and the price of crude oil, and other commodities that Canada exports.
But he said the loonie's current flight is more a case of the U.S. currency's fall, caused by prospects of a global turnaround and investors no longer seeing America as a safe haven in a sea of troubles.
The world is also factoring in the fact that as bad as the situation is in Canada, it's worse elsewhere -- the best of a bad lot syndrome.
Canada's projected $50 billion surplus this year represents 3.3 per cent of the size of the economy, compared to the U.S.'s 1.75 trillion shortfall, which is near 13 per cent of its economy.
"These numbers are fairly large, but in comparison basis not as bad as others," explained Paul Ferley of RBC Economics. "The other thing is the starting point in our fiscal position is better than most other G7 countries, so that puts us in a better position to withstand the bad news."
The $9.1 billion current account deficit set a nominal record, but as a percentage of gross domestic product it was well less than half the 5.1 per cent recorded in the first quarter of 1975.
Economists said Canadians should expect the current account -- the measure of what Canada spends and earns -- to remain in negative territory for most of the year.
As for the government books, most now say it will take six years to get out of the hole, although the finance minister is sticking to a four-year horizon.
Friday's release of the fiscal monitor will go down as an historical curiosity pinpointing the moment Ottawa officially dipped from a surplus into a deficit position.
That occurred in March, when revenues, particularly from business taxes, literally hit the wall.
The government said corporate income tax receipts were down $2.1 billion, or 46.8 per cent, from the same month last year as firms began claiming refunds for having overestimated their profits. As well, revenues from personal income taxes declined by $1.3 billion, or 12.4 per cent.
