Loonie’s flight below parity has a silver lining

The loonie’s sudden drop below parity with the U.S. dollar is a double-edged sword for Canadians.

The loonie’s sudden drop below parity with the U.S. dollar is a double-edged sword for Canadians.

The decline makes Canadian workers and goods appear cheaper, helping to spur the economy, but it also highlights the growing fear that another global recession could be occurring.

The Canadian dollar closed below par Wednesday for the first time since January and currently sits at about 97 cents US. For automakers and other manufacturers, Canadian-made exports and labourers will appear more attractive if the loonie remains low, which could help keep jobs in Canada.

But the drop in the Canadian dollar comes as investors flock to the perceived safe haven of the U.S. dollar after the U.S. Federal Reserve suggested it expects a deep and persistent downturn.

“You could say the declining loonie is the silver lining to a rather dark cloud,” said Jim Stanford, an economist at the Canadian Autoworkers Union.

“The decline in the currency itself is good news for manufacturing and anything else that we sell to foreigners. The bad news is the context for the dollar’s fall is the fear of another world problem that would make things worse.”

And while consumer groups, the travel industry and manufacturers say so far the decline isn’t big enough and hasn’t been sustained long enough to make a discernable impact, it highlights the environment of extreme uncertainty that is making it difficult to plan for the future.

A continuation of the downward trend could alter the direction of the economy, potentially reversing the impact of the loonie’s strength that has sent it as high as $1.06 US this year.

But Bruce Cran, president of the Consumers’ Association of Canada, said the loonie is still close enough to parity that it likely won’t have much impact on consumer behaviour — Canadians will continue to travel and cross-border shop, even though they’re getting less bang for their buck.

“I wouldn’t expect that type of drop to have any effect at all, after all, it’s been up to $1.04 to $1.06 recently and that hasn’t provided any relief for consumers.”

For consumers, a loonie below parity raises the cost of both everyday expenses, such as the cost of imported produce at local supermarkets, and sporadic splurges, such as international travel packages.

A lower loonie isn’t necessarily bad for the travel industry because it stimulates the economy, increasing Canadians’ willingness to spend on luxuries, said David McCaig, president of the Association of Canadian Travel Agencies.

“A lower loonie may help businesses, which means that you’re still employed, which means that you have money and vacation time to go on holiday,” he said.

Travel agencies have been reporting strong sales of winter break travel packages, which were booked when the loonie was higher, he said.

“Obviously, if it dropped down to 85 cents or something that’s a much different story,” he added.

A loonie above parity makes Canadian goods and labour appear artificially expensive, which deters the rest of the world from buying Canadian and makes it difficult to attract investment and save jobs, said Stanford.

“Our products look expensive, Canada looks expensive as a tourism destination, our workers look expensive, not because we are, but because the currency makes us look that way.”

In recent months, the loonie has fallen about 10 cents, reducing apparent labour costs in the crucial auto industry by about $6 an hour, Stanford said.

The big three Detroit automakers have identified the strong loonie as a potential reason to reduce investments in Canadian plants and to move jobs south of the border — to the U.S. or Mexico.

A sustained drop below parity could make automakers reconsider Canada as a lucrative place to invest and provide some relief to Canadian employees, he added.

Derek Lothian spokesman for the Canadian Manufacturers and Exporters association said the issue is not whether the loonie sits at 99 cents or $1.01 US, rather that exporters are concerned about the extreme swings in its value, which makes it difficult to manage risk.

There are so many headwinds for manufacturers — from recovering from the impact of the Japanese earthquake and tsunami to European countries defaulting on debt to the possibility of a double dip recession in the U.S. — that planning for the future is increasingly challenging, he said.

“If you can plan for it, you can adapt.”