Based on recent headlines, you’d be forgiven for thinking that Canada’s most significant economic problem is the falling loonie, which has slipped from parity last spring to just north of 92 cents (U.S.). It isn’t. The hand-wringing over this apparent vote of non-confidence in our country ignores two key issues: The decline is not in itself a bad news story for the Canadian economy, and the focus on the relative value of the dollar turns attention away from the more complex and more important problems of slow growth and a stubborn lack of improvement in this country’s unemployment rate.
A key spur for the decline of the loonie has been the sign of a modest rebound in the U.S. economy, which has caused the market to push up long-term U.S. interest rates. All other things being equal, a stronger U.S. economy (and the accompanying higher interest rates) will strengthen the U.S. dollar. More importantly, a stronger U.S. economy will pull ours higher.
A Bank of Montreal analysis estimates that a 10-per-cent drop in the value of the Canadian dollar can add as much as 1.5 percentage points to Canada’s real gross domestic product over two years as it spurs export-oriented industries, such as manufacturing and tourism. In other words, any harm to businesses that rely on a stronger dollar to make imports cheaper – retailers selling imported goods or travel agencies and airlines selling trips to foreign vacations – is outweighed by the greater benefit to other sectors.
The U.S. economy, still nowhere close to fully recovered from the recession, finally zoomed forward in late 2013, with GDP climbing at an annualized 4.1 per cent in the third quarter. Forecasters expect growth to accelerate in the next two years. Canada, in contrast, rebounded much more quickly from the recession, but has recently begun to slow. The economy grew by 2.7 per cent in the third quarter on an annual basis and is expected to lag the U.S. in coming years. The impact of the slower growth is seen in Canada’s unemployment rate, which climbed last month to 7.2 per cent from 7.1 per cent at the end of 2012, as Canada added more workers than jobs. That, and not a slight decline in the loonie, is the real economic problem.
There are various ways an economy can return to full employment, but one of the most tried-and-tested methods for Canada is to increase exports, taking advantage of an upswing in the world’s largest market next door. Bank of Canada Governor Stephen Poloz, who is worried above all about a sluggish economy and dangerously low inflation, has been accused of accelerating the slide in the Canadian dollar by giving the markets the impression he prefers a lower currency. If the strategy was intentional, he need not apologize.Report Typo/Error
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