While I have been fond of comparing the current situation to the 1985-86 oil-price collapse, there are some clear differences coming to the fore. While we had a drop of 0.6 per cent in GDP growth in the first quarter of 1986 as the oil price bottomed, there was a recovery of 2.4 per cent in the second quarter that year.
It wasn't a straight line from there, but by 1987, it was clear the Canadian economy was on an improving trend.
The Bank of Canada could cut aggressively back then (150 basis points) because rates were north of 10 per cent, not closing in on zero.
The credit-sensitive sectors were not nearly at the same mature phase of the cycle as is the case today.
The economy was not suffering from prior years of an overvalued currency gutting the manufacturing sector – no hollowing out then, as is the situation today.
And we had a federal government that did not resist the temptation to ease fiscal policy to blunt the blow from receding energy investment.
A big part of the reason is that we are paying the price for years when the Canadian dollar was north of par – at its peak, it was 25 per cent above its fair-value estimate and crushed our competitiveness to the point where plants were closed here and production relocated either to the U.S. or Mexico.
It will take years to recapture this lost manufacturing capacity – years of mean reversion toward a more competitive currency.
Manufacturing shipments in volume terms are no higher now than they were at the end of 1999, and 13 per cent lower than at the 2005 peak, when the Canadian dollar hovered near 85 cents on U.S. dollar basis (just a tad above where our models suggest fair value is).
Because of the length of time and extent to which the loonie was allowed to rise above its fair-value level, manufacturing capacity was sacrificed, and now it will take years of the Canadian dollar being suppressed far below its fair-value estimate to recoup that lost activity.
Automotive manufacturing used to be our bread and butter. Domestic production, while off the recession lows, is no higher now than it was 20 years ago, and is down almost 20 per cent from the prior peaks.
As the 20th century came to a close, Canada was running upward of a $15-billion trade surplus in the auto sector. That has since shifted to a record $22-billion deficit.
At the same time, the parts of the economy that are most sensitive to interest rates – consumer spending on durables and semi-durables, and housing – are already stretched to the limit.
It is doubtful that this latest Bank of Canada move or even one more is going to make much of a difference to the economy. Not to mention record debt burdens, although carrying this debt just got a tad easier.
With the Fed almost all out of bullets on the rates front and the interest rate-sensitive part of the economy having limited potential in any event, and given the Bank of Canada's dedication toward rebalancing the economy toward exports and capital spending, as well as the lack of any meaningful fiscal stimulus, the Canadian dollar is the only game in town.
Not very good news for snowbirds, but I can hear tourism operators and Shaw Festival staff cheering very loudly.
David Rosenberg is chief economist and strategist for Gluskin Sheff + Associates Inc., and author of the daily economic newsletter Breakfast with Dave.