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With the loonie flying low, common wisdom holds that it will make Canada more profitable and competitive. But that's a bit of a myth, says Glen Hodgson, chief economist of the Conference Board of Canada.
Long-term prosperity depends on much more than the depreciated dollar, Mr. Hodgson said in a wide-ranging conversation about business growth, productivity, investment and innovation.
For nearly three decades, growth in Canadian productivity has lagged that of the United States and other major industrial countries, Mr. Hodgson said. "Productivity is not that complicated. Think about value per hour worked. But the solution is complicated – there is no silver bullet for productivity."
There is no question that a Canadian dollar valued below 80 cents (U.S.) will create more foreign demand for many Canadian goods and services. But in order to capitalize on those opportunities and build sustainable competitive advantage, Canadian businesses, collectively, need to substantially ramp up investment activity and their ability to innovate, Mr. Hodgson said.
Here are his thoughts:
A 'new export era,' benefits and pitfalls
We have entered a new export era where the U.S. economy is back, the dollar is low, and "we have much stronger opportunities to sell back into the U.S. market, where our trade was flat for the last 10 years," Mr. Hodgson said.
"But then the issue becomes which businesses, what sectors, are ready for this, and who is going to have to play catch-up ... to get the productivity capacity in place to actually respond [to the opportunities].
"If you are an exporter with high Canadian content, you have opportunity because your input costs are under control by having your input prices in Canadian dollars, and your revenue will go up in Canadian dollars.
"But if you are an exporter with high imported content, it is not entirely clear whether the lower dollar is going to give you a big payback. A lot of manufacturers, for example, have built global value chains, or global supply chains, where they turn to Asian imports, Chinese imports in particular, to cut the costs of their production. With the Canadian dollar going down, their import costs have gone up and there may be some cases, in fact, where they may be a net loser."
Now more than ever, the importance of long-term strategy
The danger is that exporting businesses fall back upon relying on a soft dollar as a crutch, he said. They might be tempted to not bother with innovating in the meantime.
"On a net basis, a weaker dollar is good for exports, but the detail matters. It really matters what sector you are in and whether firms have the plant available and, for manufacturers, whether they can shift their supply chains from relying on inputs from China, from Europe, from the U.S. to have more Canadian content. 'Reshoring' is the term that is sometimes used.
"Business leaders in Canada need to understand the difference between tactics and strategy. There are tactics – what you do with the next quarter, with the next year – and then there is strategy: What you are doing with the next generation to ensure that your business is strong and growing.
Will the lower dollar trigger investment to increase productive capacity?
Businesses are still not spending cash they have accumulated.
"We have been sitting on a cash mountain for seven years, going into eight, and this is after we made adjustments to our tax code to try and persuade businesses to invest more. Canadian firms are being very cautious. We got clobbered last year by the pullback in the oil patch, but there is an opportunity for other sectors, like manufacturing or high-end services, to step up.
"Ultimately, though, confidence really matters. Businesses have to be confident that there will be an end demand for whatever they produce before they expand their footprint.
"But, occasionally, to grow, you have to take a chance, you have to ramp up your business investment activities.
"Maybe with a softer dollar, firms will be incented to do that because they will have the opportunity to export more. We are kind of assuming, in our forecast, that we will see a pickup in private investment and exporting over the next three years."
Innovation is key
Businesses need a "champion of innovation" sitting at the executive table, Mr. Hodgeson said. "You need a board that understands the importance of innovation."
They could think big – redoing their whole supply chain, for example – but incremental innovation is just as important. "Innovation is constant adaptation, innovation is the small changes that add value."
Without a culture of innovation, "you end up down in the weeds, dealing with operations every day, making decisions about operational things as opposed to looking over the hill at where you want to be in two or five years."
This interview has been edited and condensed.