Loonie's climb threatens recovery: Bank of Canada
Jun 05, 2009 04:30 AM
Les Whittington
Ottawa Bureau
The Star
OTTAWA–The high-flying loonie may make it cheaper to shop or vacation south of the border, but it won't save jobs or help put an end to the recession gripping Ontario.
In fact, the Bank of Canada warned that the dizzying rise of the Canadian dollar to the 90 cents (U.S.) range on exchange markets could mean the worst of all possible worlds for Ontarians.
Governor Mark Carney has lowered the central bank's key rate to 0.25 per cent – a historic low – to encourage borrowing and investment to fight the recession. The federal government has helped with a $35 billion stimulus package.
Until the loonie took flight, those efforts were beginning to have a positive effect, Carney said yesterday: "In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly."
But this has now been imperilled by the Canadian buck, which recorded a seldom-seen eight-cent jump in value against the U.S. dollar in a single month in May.
"If the unprecedentedly rapid rise in the Canadian dollar ... proves persistent, it could fully offset these positive factors," the bank warned.
Nowhere is this more true than in trade-dependent Ontario where some 80 per cent of exports go the United States. With demand for exports in the U.S. undercut by its severe recession, Ontario's economy is now the worst performer among Canada's provinces.
Last fall, as the global recession deepened, investors turned to the traditional "safe haven" currency, the U.S. greenback. That trend, coupled with the decline in prices for Canada's oil and other commodities, reduced demand for the loonie. Its resulting drop below 80 cents (U.S.) in October offered hope for Ontario, since it made exports more competitive.
Now, while U.S. business conditions have still not recovered – keeping demand for Canadian exports down – the currency trends that held promise for Ontario's manufacturing sector have reversed. Prices for oil and other commodities are rising and the world is losing faith in the U.S. dollar amid investor fears about the nearly $2 trillion (U.S.) budget deficit. This has produced a "generalized weakness in the U.S. currency" and driven up the loonie, Carney said.
Higher energy prices are another strike against Ontario manufacturers, pushing up production costs.
With economists expecting the loonie to stay high, doubts have been raised about whether the economy will, as predicted, show signs of recovery in late 2009, and whether the Bank of Canada will be forced to resort to untested, potentially inflationary measures to boost economic growth. |
