In Brief: The Moncton Times & Transcript called on AIMS for comment on the high-flying loonie. Ian Munro, Director of Research, pointed out that a rising Canadian dollar does present challenges for exporters, but also makes Canadian consumers richer and provides a golden opportunity for Canadian firms to invest in capital and boost productivity for the long term.
A little over a month ago every coffee shop in the country was buzzing as the Canadian dollar hit par with the U.S. dollar — the first time in memory for many.
But par was barely a pit stop for the loonie, which has continued to soar to brave new heights, hitting $1.10 US yesterday, before falling back to just under $1.08 US at the close of trading.
While this is great news for consumers who can now buy more with the same dollar they had this summer, in the business community, the steadily rising dollar is both a blessing and a curse — blessing for those who import goods and materials from the U.S., curse for those who rely on sales south of the border.
James McKenna, vice-president of Glenwood Kitchen Ltd. in Shediac, says manufacturers have been fighting the effects of a strong dollar for the past year.
He says Glenwood has increased its prices in the U.S. and cut costs internally to compensate.
“To some degree we’ve been able to mitigate the increase in the dollar, but at $1.10 we are getting nervous that there is not much more we can do,” he says.
But there are two sides to every coin.
“There are some sectors that will feel it, we’ve already seen the manufacturing sector hit hard,” says Ian Munro, director of research for the Atlantic Institute of Market Studies. “Conversely, we have seen the energy sector take off. In overall strength, we all have more money in our pockets… It’s good for the economy that the dollar is strong, it’s just some sectors will feel the pinch.”
Munro says a strong dollar also presents manufacturers with a golden opportunity to update their equipment — much of which comes from outside Canada — while prices are low, then benefit from improved productivity.
McKenna says businesses started being impacted when the Canadian dollar hit $0.85 US, 25 cents ago.
He says they’ve been able to weather the storm at Glenwood without laying off a single employee, and don’t expect they’ll have to.
“In the U.S. we’re busier than ever and have not had one complaint from a U.S. dealer yet with regard to prices. We’re confident that if we can weather it out at its high until it moves down, once it moves back down, we’ll be doing extremely well,” he says.
But McKenna expects the latest rise in the dollar may be the final straw for some manufacturers.
“I would think other manufacturing businesses will see an immediate impact. We are in a high-end custom business. Businesses that are in the low margin business would be in big trouble,” she says. “I would think a lot of companies have been taking a hit for the last year and hoping it will go down and it keeps going up. If we factor in the U.S. dollar, factor in increases in electricity rates, factor in increase in wages, increase in business taxes and general inflation, there is a lot stacked up against manufacturers right now.”
Vaughan Dickson, an economics professor at University of New Brunswick, says any time there is a huge change like this, there are winners and losers.
“One of the reasons the Canadian dollar is rising so quickly is because the price of energy is increasing,” Dickson says. “Canada is exporting energy. The problem is that the energy intensive parts of the economy will really experience a boom, I’m talking about the west, and that will cause some problems for manufacturing sectors in the eastern part of the country.”
However, Dickson says some of the impact may be mitigated by the current low unemployment rate.
“On balance, labour markets are very hot right now,” he says. “(Employers) may be able to find some employees because the exports sector will be releasing some employees.”
Munro says government can help mitigate the negative impacts of a strong loonie, and indeed, have already begun to do so.
“It is mainly on the tax side,” he says. “In the recent mini budget they made an announcement about lowering tax rates which can take a bit of the sting away.”
The federal government also called on the provinces to follow suit.
Munro would rather see lower taxes than have the Bank of Canada step in. He says its focus on controlling inflation only has proved very wise and has contributed greatly to the strength of the economy.
“I think it would be a big mistake for the Bank of Canada to abandon that policy to fiddle with the exchange rate,” he says.
Pros and cons duly weighed, Dickson says a strong dollar is probably a good thing.
“I think on balance you prefer to live in an economy where, over time, the exchange rate is appreciating, where over time you are doing well in comparison with the rest of the world,” he says.
Where Canada may have a problem is in the dollar’s rapid rise.
“It was too big a jump in too short a time and it is not justified by the underlying performance of the two economies,” Dickson says.
That, and no one saw it coming.
“I think if you look at the predictions from a year ago, some said maybe we’ll hit (par) by a year from now or two years from now,” Munro says. “This is new and different.”