Falling loonie tied to underperforming economy
Many economists predict Canada will lag U.S. in growth
The Conference Board of Canada is calling the decline in the Canadian dollar the economic story of the year so far, predicting further declines as the Canadian economy underperforms.
The loonie began the day stronger on Thursday, rising to 91.48 US in early trading, up from its close of 91.37 US yesterday. It closed up 0.16 of a cent to 91.53 cents US.
The Canadian currency fell 6.6 per cent in 2013, after trading at par with the greenback in February, and is down more than three per cent since the beginning of the year.
Markets are betting that the Canadian economy will continue to underperform- Glen Hodgson, Conference Board
The Conference Board, an economic and policy think tank, said the falling dollar is a sign of lack of confidence in Canadian growth prospects.
“Arguably more important than the value of the loonie is the signal it sends about the Canadian economy. Markets are betting that the Canadian economy will continue to underperform,” chief economist Glen Hodgson said in a report released today.
“This assessment is consistent with our own forecast, which calls for U.S. gross domestic product to grow by 3.1 per cent in 2014, much better than Canadian growth of 2.3 per cent,” he continued.
Hodgson is not the only economist predicting Canada’s GDP growth will underperform the U.S. Towers Watson’s annual survey of Canada’s top economists and analysts found most believe Canada will lag the U.S. in both economic activity and job creation over the next few years.
Too many plant closures
“With a lower Canadian dollar, there is hope that manufacturing businesses, and certainly the export sector of the economy, can contribute to reducing the unemployment rate in the next few years,” said Janet Rabovsky, Towers Watson director of investment consulting.
“That being said, recent announcements about industrial plant closures in Ontario would indicate that the cycle has not yet turned."
Hodgson agreed that it is not clear if Canadian exporters will be able to fully capitalize on a weaker dollar because of the loss of capacity in the manufacturing sector since 2008.
There have been deep slashes in export-dependent industries — such as autos and parts — and a shift of much U.S. production to the southern states, so Canadian suppliers may not benefit as quickly as in the past from the U.S. recovery, he said.
He also points to the hit consumers may take from higher prices.
TD chief economist Craig Alexander said the U.S. Fed's “decision to taper asset purchases has greased the skids under an already depreciating loonie.”
Traders rush back to U.S. dollar
The Fed decided in December to taper its U.S. bond-buying program to $75 billion US a month and as good economic news out of the U.S. continues to roll in, it is expected to continue tapering.
But that has encouraged traders to buy the U.S. dollar, leading to a rush away from the Canadian dollar.
“However, the fundamentals are not Canadian-dollar positive either, and the loonie likely has further to fall,” Alexander said in a research note.
BMO chief economist Doug Porter predicts a falling dollar will actually help boost Canadian GDP in the long-term – as much as 1.5 percentage points over the next two years if the loonie falls to 90 cents or lower.
"There are definitely losers, such as consumers, travellers, utilities, broadcasters, sports teams. But there are also lots of winners. The beleaguered manufacturing and domestic tourism sectors will find the biggest relief from the weaker currency. Even some retailers will be breathing a tad easier, as the loud siren call of cross-border shopping fades for consumers with each tick down in the currency,” he said.