OT: For all my Canadian friends on this board from MacLeans
macleans.ca
The diving loonie: How much lower can our beleaguered dollar go?
February 4, 2002
JULIAN BELTRAME in Ottawa
Even before the Canadian dollar
plunged to historic low last week, Arthur and
Joan Elgar had given up on their Florida
dreams. Snowbirds since 1991, when the
loonie hit the heady heights of US89.29
cents, the Elgars had planned to spend their
winters in Dunedin for as long as their health
permitted. But with each passing year,
their Canadian dollars
bought fewer and fewer creature comforts. In October, they set out for
the Sunshine State, not to wait out the Canadian winter, but to sell their
mobile home. They got US$2,000, one-tenth what they'd paid a decade
earlier. It seems they weren't the only Canadians selling their properties,
and there were few takers. "I know, personally, seven or eight
Canadians who have put their homes in Florida up for sale," Arthur, 77,
told Maclean's. "It's just gotten so expensive."
Even more so, for those snowbirds still toughing it out. On Jan. 18, the
Canadian dollar hit an all-time closing low of US62.02 cents, dropping
nearly one cent in three days. During trading last Monday, it sunk even
lower, to 61.75 cents before settling in the rest of the week at barely
above 62 cents. The unexpected swoon left many in Canada scrambling
for reasons. The boilerplate explanations rolled out in the past just didn't
fit this time around. Quebec separatists? Well . . . not since the 1995
referendum. The federal deficit? It's so yesterday -- Canada may be the
only country in the G7 club to have a balanced budget next year. Weak
commodity markets? That would have made sense last year, but prices
have firmed since mid-December. "I haven't heard one explanation for
the dollar's plunge that makes sense," says Don Drummond, chief
economist at the Toronto-Dominion Bank.
If economists were flummoxed, Finance
Minister Paul Martin was practically
pleading for answers. Last week, he took
the uncharacteristic step of calling a
news conference to talk up the
beleaguered currency. It may all be a
failure on the part of currency traders to
appreciate the underlying strength of
Canada's economy, he suggested. Bank
of Canada governor David Dodge followed up two days later with much
the same message. And the standard bromide -- most other national
currencies are in the same sinking boat -- was offered, as if Canadians
could take solace in shared misery. But as the week progressed, there
were few signs the markets had seen the error of their ways. Or that
hard-nosed international traders were taking seriously the government's
complaints that they were selling the loonie short.
While the precipitous drop of the past week or so may be a mystery, the
dollar's incredible shrinking act over the last decade is not. As
Drummond points out, it matters little that Martin and Dodge are right in
extolling the fundamental strength of the Canadian economy. The dollar
is not a barometer of the economy in isolation, he notes. So while it may
be true that Canada's economy is stronger than in the past, it had not
been growing as fast as the U.S. economy. Similarly, Canada may have
lowered its public debt, but not as much as the U.S. Ottawa cut taxes,
but Washington did it first and deeper. Between 1995 and 2000,
Canadian labour productivity increased by 1.2 per cent annually, but it
grew by 2.4 per cent south of the border. "All the improvements we've
made," says Drummond, "have fallen short of where the U.S. placed the
bar."
Does it matter if Canada falls short of matching the world's most
powerful economy? At one level, no. In fact, as Prime Minister Jean
Chretien has often stated, a lower dollar helps Canadian exporters sell
more products to American consumers. That's one reason Canada has
piled up huge trade surpluses with the United States, in part fuelling the
country's economic boom throughout the latter half of the 1990s.
Nor has the limp loonie dramatically altered the way Canadians live.
"Our standard of living is not affected by the lower dollar," states Jim
Stanford, an economist with the Canadian Auto Workers. That's
because about 75 per cent of what Canadians buy in goods and
services is generated domestically. Even in the case of imports such as
automobiles, retailers have passed on only a fraction of the dollar's lost
value to consumers. For example, a BMW 330i carries a recommended
sale price of US$33,990 south of the border and $46,500 in Canada. If
the Canadian price tag reflected the full U.S. value of the luxury import,
the car would retail for about $53,400. "Prices are made according to the
market, not the exchange rate," explains Hendrik von Kuenheim,
president and CEO of BMW Group Canada. Put another way, says
Stanford, dealers don't pass on the full load of the depressed loonie for
fear few would buy their automobiles.
But at a deeper level, Canada cannot bargain shop forever without
paying the price later on, say most economists. One obvious
consequence of the lower dollar is that Canadian firms are unable to
purchase the imported equipment they need to modernize and remain
competitive. Even more alarming, adds Jeff Rubin, chief economist for
CIBC World Markets, is that should the slide continue, Canadians may
choose to adopt the U.S. currency as their own in order to avoid future
devaluations. "Then people will wake up one morning and find their life
savings in RRSPs and their homes are worth a lot less than they
thought," he says.
With the loonie appearing to stabilize at week's end, there was no
appetite in Ottawa for quick fixes such as adopting the U.S. dollar. Nor
did Martin and Dodge hint at a rescue effort, such as raising interest
rates or dipping into the Bank of Canada's US$34.2-billion foreign
currency reserves to defend the loonie. Instead, Martin insisted policies
aimed at strengthening the economy will eventually buck up the dollar.
It's a long-term recovery strategy -- possibly too long for Arthur and Joan
Elgar. "I'd go back to Florida if the dollar came back," said Arthur. "But I
don't see it happening soon." |
