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Factory shipments surged in the first month of the year, showing manufacturers are finding ways to live with a white-hot loonie that's cruising toward parity with the U.S. dollar and making Canadian-made goods more expensive abroad.

Factory shipments jumped 2.4 per cent in January, four times as much as expected, to the highest sales level since November of 2008, Statistics Canada said Tuesday. It was the fifth straight gain for the sector, and the latest sign that exporters are learning to adapt to a soaring Canadian dollar - which approached the 99-cent (U.S.) level Tuesday, closing at 98.62 cents (U.S.).

Finance Minister Jim Flaherty in London said Tuesday that Canada's "relatively strong fiscal position" is helping to boost the currency.

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The loonie's level is "competitive," and the economy would only be in jeopardy if the dollar surged to "really an uncompetitive level, but that isn't anticipated," he said earlier this week.

Mr. Flaherty's measured tone is a far cry from last summer, when he mused that "steps" might be taken to temper the loonie. Last fall, when it appeared speculation about interest-rate hikes was largely responsible for the appreciation, Bank of Canada Governor Mark Carney had warned that he too had ways to arrest it.

For years, Canadian exporters enjoyed an advantage from a low currency value, which made prices competitive in world markets. But the Canadian dollar's push past parity a few years ago and its recent strength have forced companies to find ways to market goods and make profits despite the strong currency.


"Canadians in general now believe they can't hide behind a weak dollar," said Rick Jamieson, co-founder of ABS Friction, a maker of brake pads that employs about 100 people in Guelph, Ont. "It's hard to adjust, but we're going to do it."

Canadian companies are going to have to become "more efficient, and have fewer jobs," said Mr. Jamieson, who has no current plans to hire new workers even as the economy slowly improves.

Businesses are more aggressively seeking markets outside the U.S., looking to emerging markets in Asia and the Middle East, where there are new customers to tap into. Factory owners are cutting costs - especially salaries - and investing in more efficient equipment in order to remain profitable. These changes could lead to a manufacturing industry that makes higher value products, such as Germany and Italy. The downside is that leaner-and-meaner factories employ fewer people.

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Indeed, many Canadians feel they're working harder these days as companies accommodate increasing demand with work forces cut back during the recession.

Another Statscan report yesterday showed that labour productivity posted its biggest gain since 1998 in the fourth quarter. That occurred without an increase in hours worked, suggesting businesses had to scramble to fill orders that picked up sooner than anticipated - without adding many new workers.

Still, companies could hire more people eventually if manufacturing gains continue even with the lofty loonie.

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"The manufacturing sector exports about half of its production and imports about a quarter of its inputs, so in that sense any increase in the Canadian dollar will diminish revenues, other things being equal," Marc Pinsonneault, senior economist at National Bank Financial in Montreal, said in an interview. "But now other things are not equal, because demand for Canadian goods is increasing from the worldwide recovery."

Last week, the Ottawa-based Conference Board of Canada released a report indicating factories are also creating natural hedges against the currency's value, by setting up plants in other countries and sourcing more of their products abroad.

Should the currency go beyond parity, it likely wouldn't stay high long enough to do serious damage, National Bank's Mr. Pinsonneault said, because it will drop against the U.S. dollar once American employers start adding workers, which in turn would be good for Canadian business.

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Policy makers also may be more sanguine about the currency's ascent this time around because it acts to restrain inflation, meaning there's less risk the Bank of Canada will push interest rates up too quickly for the recovery to handle.

According to Bank of Montreal deputy chief economist Doug Porter, a "very rough rule of thumb" is that every one-cent gain in the exchange rate knocks about 0.1 percentage point off the country's inflation rate.

"One way or another, policy is tightening over the course of the rest of this year," Mr. Porter said in an interview. "It's either going to come through the currency, interest rates, or a bit of both. Increasingly, it looks like it'll be a bit of both."

With reports from Tavia Grant in Toronto, Doug Saunders in London and Bloomberg News

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About the Authors
Economics/business writer

Jeremy has covered Canadian and international economics at The Globe and Mail since late 2009. More

Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More


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