Talking down the dollar has costs: critics
The Canadian PressThursday, January 23, 2014
OTTAWA - The Conservatives may see the loonie's downward trajectory as giving the economy a fortuitous boost, but critics say talking down the currency could also exacerbate underlying problems in Canadian business.
Finance Minister Jim Flaherty has made a point of noting that a weak dollar can spur economic growth by boosting exports — a boon for a government with its sights set squarely on balancing the books.
The loonie slid to 90.10 cents U.S. on Thursday, dipping briefly under the 90 cent mark for the first time since mid-2009. It's lost four cents since Dec. 31 due to a combination of factors including a strengthening U.S. dollar, weak prices for commodities and Canada's low-interest, low-inflation environment.
But the economy can't turn so quickly to take advantage of a lower dollar, said NDP finance critic Peggy Nash. Many of manufacturing jobs that were lost under the Tories' watch aren't coming back.
The economy is underperforming and the Tories are "desperate to show that they can balance the books before the 2015 election and trying everything possible to do that," Nash said.
"We have a current account deficit for our exports of over $60 billion — this is an all-time high — and a very low level of private-sector investment in spite of the Conservatives cutting tens of billions of dollars to corporate taxes," she said. "So clearly their strategies have been a failure."
Derek Burleton, deputy chief economist at TD Bank, noted the Bank of Canada is still concerned about the export sector.
"I think one of the big uncertainties is how well-positioned Canada's export sector is to benefit from improving U.S. demand," he said.
"There used to be a much stronger link between U.S. spending and Canadian exports, but that link has weakened in recent years as the Canadian dollar has appreciated. And even though the dollar lost ten per cent of its value last year, we really didn't see any notable benefit to Canadian export."
Bank of Canada Governor Stephen Poloz emphasized Wednesday that the increase in U.S. demand is more important for domestic economic growth than a weak loonie. The marginal boost of a lower dollar is just "the icing on the cake," he said.
But the bank's language about the dollar has left some economists thinking it still sees the loonie as overvalued.
In its latest economic reading, the bank said it expects the currency to remain strong and "continue to pose competitiveness challenges for Canada's non-commodity exports."
For some, that suggested the bank thought the dollar wasn't low enough to stimulate exports and improve Canada's competitiveness as an investment location, said CIBC economist Peter Buchanan.
Flaherty isn't addressing Canada's declining international competitiveness and the sluggish growth in productivity, said former Liberal finance minister Ralph Goodale.
"The change in the currency may make it appear that that has improved, when in fact the underlying problems continue and indeed, may be getting even worse," he said.
But the Tories "obviously think there's some advantage here for them to be aggressively talking down the value of the dollar," he said.
The Tories may be trying to "concoct" the appearance that Canada's trade balance is improving, given that a weaker currency helps exports and impedes imports, he said.
"The downside to that, of course, is that it also papers over some fundamental challenges, that the Canadian economy has not very effectively addressed."
A weak dollar may lower the cost of exporting, but it also raises the cost of importing goods, such as equipment, which can hurt productivity, he said.
More expensive imported goods also hurt the average consumer who's already struggling with record-high household debt, Nash said.
Flaherty should stay away from talking about where he thinks the dollar should be, she said. "That's not his responsibility and it's not appropriate for him to be seeming to be influencing those key economic indicators."
The minister's spokeswoman said monetary policy is the central bank's responsibility and he has "full confidence that appropriate policies are in place."
"Canada has a market currency, meaning the value of the dollar is determined by markets — not government," Marie Prentice said in an email.