Watch: Globalnews.ca business editor Jamie Sturgeon takes us through what it means for the Canadian economy due to the falling loonie.
For the hundreds of workers in Hammond Power Solutions’ three Canadian factories, there’s a definite upside to a depressed dollar – added job security.
For those who might yet land a job at one of the plants because of the downward currency swing, it could mean even more.
The loonie has been on a sharp slide against the U.S. greenback for several weeks for a number of reasons, including the opposing directions the Canadian and the U.S. economies are chugging along at.
South of the border, the U.S. appears to be entering full-fledged rebound mode, led by a housing boom – yes, housing boom – meanwhile Canada’s real-estate market has just come off a record run while a debt-fueled spending spree by consumers is now tapering off.
While the dollar’s drop puts a damper on cross-border shopping adventures for those still in the mood to spend, a lower loonie will benefit exporters and manufacturers, experts say – the very companies the Bank of Canada and others hope will help keep the economy on its feet while households rein in debt.
“A lower dollar is going to give manufacturers and exporters a price boost,” said Jayson Myers, chief executive of Canadian Manufacturers and Exporters, the country’s largest trade association of companies who ship their goods abroad.
Most companies that focus on exporting their goods, such as auto-parts makers, timber companies, commodity producers among others, price their products in U.S. dollars. One benefit of booking sales in a higher currency is seeing that total grow once it’s converted into Canadian funds, Myers said.
“That’s good for cash flow, investment and business in general,” the CME head said.
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“It will help us now from a bottom line perspective,” said Bill Hammond, chief executive of Guelph, Ont.-based Hammond, which manufactures generators.
But Hammond, which has built electrical equipment in Canada since 1924 and has expanded to the United States, Mexico and elsewhere, may also start bringing production back, says its chief who’s also the grandson of the company’s founder.
Underpinning the loonie’s decline against the U.S. dollar is growing optimism that a meaningful recovery is underway at last in the world’s largest economy.
U.S. home prices jumped 12.2 per cent last month compared to May 2012 – the most in seven years. The auto market is also on fire, with General Motors, Ford, Chrysler and Toyota posting strong gains which industry analysts say are expected to be sustained.
While the optimism about the U.S. economy and pessimism over Canada’s has left the local currency out of favour, it’s driving up demand for goods and resources north of the border.
Export Development Canada said last week orders from Canada’s biggest trading partner have ticked higher in recent months, with 80 per cent of companies in a semi-annual survey saying U.S. shipments have increased or remained the same.
“This is a strong and growing signal that the U.S. recovery is having an impact on Canadian export sales,” EDC said.
“Orders are firming up,” Myers said.
Experts say another potential positive is the flow of more expensive foreign goods. While consumers may dislike price adjustments to some items if the dollar remains low, as some expect, higher inflation might actually be a good thing.
Here’s how: Borrowing rates have been left historically low to spur lending, but the policy has worked too well in some corners as consumers have piled on historic amounts of debt.
If inflation begins to pick up, it will provide more reasoning for the country’s central bank to begin lifting interest rates to help tame inflation – a potentially risky but necessary move to address sky-high debt loads, argues Francis Fong, an economist at TD Economics.
“A lower Canadian dollar raises our import prices, which in turn raises the pace of inflation,” Fong said.
“That’s notionally a positive, from a financial stability standpoint.”
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