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High dollar’s impact fleeting for most Canadian factories, report says

A new report says Dutch disease has only had a transitory impact on most Canadian factories.

Jeff McIntosh/THE CANADIAN PRESS

Dutch Disease never amounted to much in the Netherlands, and Canada's petro-infused dollar has likewise had a transitory impact on factories here, says a new study by the Macdonald-Laurier Institute.

With few exceptions, Canadian manufacturers adjusted to the high dollar in the mid-2000s and are now poised to help lead the economy as the U.S. housing and auto sectors rebound, author Philip Cross concludes in Dutch Disease, Canadian cure.

"If manufacturers in Canada suffered from Dutch Disease after 2002, it was a very mild case affecting only a small number of industries," said Mr. Cross, former chief economic analyst at Statistics Canada and now research coordinator at Macdonald-Laurier in Ottawa.

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And factories adapted by reducing their dependence on exports and buying more foreign inputs, embracing a highly effective "natural hedge" against the high dollar, said the study, released Wednesday.

Those companies that didn't adjust "closed their doors a long time ago," he said.

Dutch Disease is a term coined by economists to explain the impact of a 1960s offshore natural gas boom on manufacturing activity.

Mr. Cross said Dutch Disease was largely a myth in the Netherlands, and so too in Canada.

He pointed out that manufacturers have led the recovery since 2008-09 recession. Manufacturing output is up 12.2 per cent since the second quarter of 2009, ranking it third among 18 major industry groups in Canada.

"The recovery of manufacturing has shown impressive depth," he said. Among manufacturers, only food and paper producers haven't contributed to output growth.

Mr. Cross does acknowledge there have been winners and losers within manufacturing. Machinery, and particularly construction machinery, makers and transportation equipment have done very well. Food, petroleum, metals and electrical products manufacturers also did well.

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Several other industries saw sales fall between 2002 and 2011, including autos, beverages, textiles, wood, paper, computer products and furniture.

The untold story, according to Mr. Cross, is how well manufacturers have adjusted. The secret is that manufacturers, more so than other businesses, import roughly a quarter of their inputs.

The study found that the foreign input share rose to 28 per cent in 2008 from 24 per cent in 2003.

This effectively "cut in half" the exposure of manufacturers to the high dollar, Mr. Cross argues.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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