Strong Loonie, Opportunity Or Threat

A strong loonie is a mixed blessing

The current historical high for the Canadian dollar, currently at $1.07 US, delights some and terrify others. As Eric Beauchesne points out an economic think-tank is warning that Canadian cross-border shoppers will rob the Canadian economy of billions of dollars in economic growth. The surge in cross-border shopping due to the strong dollar … could knock nearly three-quarters of a percentage point off growth in the Canadian economy, says Action Economics, an online research firm. What is an opportunity for consumers is clearly a threat for manufacturers here in Canada.

Peter Hadekel in the Montreal Gazette this week felt that Montr?al would be feeling the heat from this strong loonie. This affects particularly Montreal’s manufacturing base.

The stronger dollar means that manufacturers are less competitive in their principal market, the USA. More than 77 per cent of the region’s exports head south of the border. The lobby group Manufacturers and Exporters Quebec, or MEQ, estimates exports to the U.S. market are down three per cent vs. last year and Canadian exporters have lost 20 per cent of their market share in the United States.

The reverse side of the coin is that it is now cheaper to buy new manufacturing equipment from the US. This could reduce the manufacturing cost. However this does not compensate for the much bigger effect on sales volumes. The MEQ points out that 130,000 manufacturing jobs have gone in the last two years. For each one percent rise in the exchange rate, the impact on Quebec manufacturers is about $400 million.

A study by Informetrica, an Ottawa-based economic think tank, estimates that for Canada the positive impact of a $10-billion, or 3.3-per-cent increase, in manufacturing exports over four years would generate 67,000 new jobs directly plus 48,500 spin-off jobs, three quarters of which would be in the services sector. It says a decline of that magnitude would have the same effect in the other direction. Clearly any concerted actions that can reverse the drop in exports for manufacturers are highly beneficial. However the strong loonie makes that quite a challenge.

Related: Strong loonie may lead Canadian economy to collapse – Pravda