High dollar signals tough times in job growth

It’s not an election issue, But the high exchange rate for the Canadian dollar is going to make it that much harder to reduce our unemployment rate and create new jobs through business investment.

It’s not an election issue, But the high exchange rate for the Canadian dollar is going to make it that much harder to reduce our unemployment rate and create new jobs through business investment.

Rather than attracting investment, it could cause businesses to fail.

When our dollar was low — as low as 63 U.S. cents a few years ago — it meant that Canadian exports were cheap in foreign markets and that foreign travellers could have low-cost vacations in Canada.

But with our dollar at about 103 U.S. cents, the opposite is true — our exports have become much more expensive while

American vacationing families will find it cheaper to stay at home.

If there is an ideal rate for the Canadian dollar, it is what economists call our purchasing power parity rate, and that is about 85.5 U.S. cents.

Like Australia, Canada has become an economy where our fastest-growing business activity consists of digging stuff out of the ground and shipping it abroad. With high, and rising, prices for oil and other commodities, Canada’s dollar value reflects the rising value of our natural resources, just as Australia’s currency does.

In its latest monetary policy report, the Bank of Canada’s assumptions for the Canadian economic outlook for the next several years include an exchange rate averaging 103 U.S. cents and continued high oil and non-energy commodity prices, from minerals to food.

Yet it is also counting on high levels of business investment and export growth to drive the economy and generate jobs.

Yet that investment may be occurring largely in the resource industries and the export growth may come largely from resource exports.

This is bad news for Canadian manufacturers and tourism businesses.

According to the 2011 report from Statistics Canada on planned public and private investment in Canada this year, capital investment in the oil and gas and mining industries will total $53 billion this year while capital investment in the manufacturing sector will total just $17.1 billion.

Since the 2009 recession year, capital investment in the resource sector will be $12.5 billion higher while capital investment in the manufacturing sector will be just $2.7 billion higher.

Bank of Canada Governor Mark Carney has acknowledge that the high dollar is a negative for Canadian growth but it’s not clear what he can do to change the outlook. He can — and should — avoid interest rate hikes since the high dollar is curbing inflation pressures by making imports cheaper and an interest rate hike, absent a U.S. rate hike, would send our dollar even higher.

Carney has jawboned business about using the lower cost of imported machinery to invest in productivity-boosting activities. But if businesses see limited opportunities for sales, they won’t invest.

The Conference Board of Canada argues that Canada must do more to attract foreign direct investment. If this means selling more ownership of Canadian companies to foreign business interests, this makes little sense, and the lion’s share of foreign investment consists of foreign takeovers of Canadian companies.

But if it means attracting more foreign companies to establish new businesses in Canada — what are called greenfield investments — then that makes more sense. But there are two strikes working against Canada on that front.

One is that the great growth markets are elsewhere, such as in China, India and Brazil, so that multinationals, with limited capital, will typically choose investments in those countries rather than investments in Canada.

While NAFTA proponents had predicted that Canada would become a base for multinationals serving Canada, the U.S. and Mexico, this has not happened.

Border is still a barrier. Moreover, as a survey of Japanese multinationals said some years ago, it would be better to invest in the U.S. if access to markets was the key consideration, since no border hassle, and in Mexico, if the cost of labour was a key consideration.

The other is our high dollar. The high exchange rate now makes Canada a more expensive country from which to operate. The cost advantage we enjoyed in attracting foreign investment with our low dollar in the past has now been wiped out. We are now a high-cost country in global markets.

A Statistics Canada report published a year ago, by John Baldwin and Beiling Yan, found that “a real appreciation of the Canadian dollar relative to the U.S. dollar significantly increases the probability of a plant death,” and that this was even truer for foreign subsidiaries operating in Canada.

We are in for some tough times as we adjust to a high Canadian dollar and this could affect jobs.

David Crane can be reached at crane@interlog.com