“Producers win, consumers lose.”
That sums up, in the broadest of strokes, how a falling dollar will affect the Canadian economy, according to Doug Porter, chief economist with the Bank of Montreal.
After years of near parity with the U.S. dollar, the Canadian dollar began falling in October 2013 in response to the Bank of Canada’s changed stance on interest rates and against the backdrop of strengthening economies in the United States and Europe.
“For years they had been warning us that interest rates were going to go higher, when they had the chance, and they dropped that language last October,” Porter said.
The Bank of Canada has since indicated it may even be comfortable with an interest rate cut. The bank’s overnight target rate has remained at 1% since September 2010.
For B.C.’s economy, the clear-cut winners will be export-oriented resource industries like forestry, natural gas and mining.
“Lumber would benefit from a couple of sources: not only is the Canadian dollar down a little bit but they’re seeing this up-shift in the U.S. housing market,” said Bryan Yu, an economist with Central 1 Credit Union.
A lower dollar will also benefit B.C.’s tourism sector by attracting American visitors and encouraging B.C. residents to “staycation” close to home.
Tourism businesses in Vancouver saw a 4% increase in overnight visits in November 2013, the latest month for which data is available, said Stephen Pearce, vice-president of leisure travel and digital marketing at Tourism Vancouver.
“We’re pretty optimistic about at least the short-term outlook for 2014,” Pearce said. “We have campaigns of one kind or another in about 11 different geographic markets, but the U.S. is without question our bread-and-butter market. That and domestic travel account for the majority of the customers who come here.”
Manufacturing will also benefit from a falling currency, although companies will likely have to pay more for inputs such as machinery.
“When you look at the Canadian manufacturing landscape, most people depend on their exports,” said Marcus Ewert-Johns, vice-president for British Columbia at Canadian Manufacturers and Exporters.
One area of B.C.’s economy that may see mixed results is retail, Porter and Yu both said. On the upside, the lower dollar may give potential cross-border shoppers pause.
But Canadian retailers will also struggle with higher-priced imports at the same time a competitive retail environment is pressuring them to keep prices low.
“There’s been little retail inflation in the past couple of years,” Yu said. “The retailers themselves are struggling to deal with new competitors in the market, like Target (NYSE:TGT) … and a further increase in U.S. retailers coming in, like Nordstrom (NYSE:JWN).”
It’s easy to forget that the Canadian dollar routinely settled in the US$0.70 to US$0.80 range throughout the 1980s and ’90s, Porter said. When the currency was at parity with the American dollar, it put pressure on Canadian exports and labour costs.
“Companies didn’t adjust immediately,” Porter said. “But what we’ve seen even in recent months is a lot of plants and companies just shutting down their operations in Canada because they didn’t see any end in sight for that high exchange rate and they didn’t think we could compete.”
The Bank of Montreal is predicting the Canadian dollar will dip to US$0.85 within the next few months before recovering to US$0.90 by the end of 2014.
“The manufacturing sector and the tourism sector have been suffering so much, I think if the currency were to slip a little bit further it will actually be a mild positive for the economy,” Porter noted. •
