Are We Winning or Losing?

Wednesday, November 21st, 2007
By Inya Ivkovic, MA for Profit Confidential

Since the loonie embarked on its recent uptrend (to say the least), just as there were many happy Canadian shoppers, there were also just as many naysayers, predominantly forecasting doom and gloom for the Canadian economy. Estimates range from economic slowdown, to evaporating manufacturing jobs, to disappearing profits.

Now, there is no denying that the soaring loonie has had, and will have, an adverse impact on certain aspects of our economy. However, what about the good things that came out of the soaring loonie? What is the actual net balance of the Northern tiger?

It is a fact of life that our economy is highly dependent on exports. That is particularly true when it comes to exporting south of the border. In addition, the higher the value of our currency, the less competitive it becomes on the international trade scene — another fact of life. So, how come the Canadian economy is not teetering around on wobbly legs?

Some analysts believe this is because the importance of exports to the economy might be overstated. Now, I agree, this sounds like an oxymoron, but upon a closer read of the supporting arguments, there just might be something to it. For example, the Canadian economy focuses on exporting finished products, which have become more expensive in the wake of the recent appreciation of the Canadian dollar.

However, when making this statement, there are variables excluded, such as cheaper imported raw materials and half-finished products, as well as the tools and machinery used to manufacture the finished product. So, on net balance between imports and exports, the Canadian economy might not be completely on the losing end.

I’ve often mentioned how the U.S. is our major trade partner and how that relationship has been in jeopardy, as the loonie kept on climbing. That hasn’t changed as the starting premise when making an argument. However, what has changed is the degree of exposure, you might say.

For example, according to Statistics Canada, five years ago, Canadians exported approximately 84% of their goods and services to the U.S. In contrast, last year that number decreased to 76%, on top of which many industry experts claim the actual net percentage is even lesser because a portion of the exports are only traveling through the U.S. en route to other countries and are not intended for U.S. buyers.

Finally, Canada has a competitive advantage in a number of high- demand products on international trading stages. One such product is oil and gas, which is also perfectly inelastic. This means that, regardless of the price of a product, the demand for it is not likely to change.

There are other fronts where we are winning. For example, the travel industry catering to Canadians traveling to the U.S. has seen a pleasant boost in revenues. Also, Canadian corporations have found themselves finally in a position to go on a shopping bender south of the border as well. It seems that ailing American banks have started forming long lines in front of the “chopping block.”

To reiterate, compared to the disadvantages of a strong currency, the advantages may not be as obvious or as publicized by the media, but that doesn’t mean they don’t exist. Quite the contrary! In the financial markets, it is often all about a tradeoff. Sure, there is no denying that strong currency can cause problems in any economy, but there are always offsetting benefits to help keep things in perspective.

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Tags: canadian dollar, U.S. mortgage rates