The lower Canadian dollar may not be good for Canadians after all, a new Fraser Institute report released March 20 suggests.
The usual argument is that a lower Canadian dollar – which fell to below US$0.89 Wednesday – means higher exports, as demand for Canadian goods, which are now relatively cheaper, increases. But Philip Cross, a former chief economic analyst with Statistics Canada, said the evidence to support that theory isn’t there.
“The volume of exports shows little sensitivity to the exchange rate,” Cross said in the report published by the Fraser Institute. Instead, he said, “the volume of Canada’s exports is largely determined by the trend and composition of demand in our major export markets.”
This means the trickle-down effects of increased exports – increased economic activity leading to increased jobs and higher wages – aren’t there either.
Yet, on the flip side of the coin, consumers are still faced with higher prices for both goods that are priced in foreign currency and imported goods.
For example, energy is priced in US dollars, which affects the price of gasoline and some home heating fuels.
In Canada the lower Canadian dollar pushed up the price of gasoline 4.6% in January 2014 compared with January 2013. At the same time, gas prices in the U.S. remained relatively flat (up 0.1%).
The price of fruit and vegetables, which Canadians import during the winter months, was up an average of 4.1% in Canada over the year, while prices actually dropped in the U.S. over the same time period.
And cross-border shoppers, as well as online shoppers buying from U.S. websites, will automatically face higher prices.
Businesses in Canada are also faced with higher costs as 55% of machinery and equipment is imported.
As a result, “the benefits of the lower exchange rate for the Canadian dollar are likely to be outweighed by the costs,” Cross wrote. “The benefit to manufacturers will be limited… Meanwhile, the lower dollar will boost some prices for consumers and businesses.”
