Time to Take a Trip South of the Border

Canadians are getting impatient waiting for our long-awaited currency parity with the greenback to filter down to retail prices. So, we are packing our shopping bags, converting our soaring dollar into poor little greenbacks, starting our cars, and cruising merrily to the Canada-U.S. border. For some, the routine after the FX transaction is to pass through customs and hop on a U.S.-bound flight.

According to Statistics Canada, overnight air travel by Canadians to the U.S. increased by 7.9%, while overnight car travel increased by an amazing 14.1%. The way things look now, our “shopping” trend is likely to maintain its torrid pace.

What are we buying? Well, basically anything from cars, to cosmetics, to property. According to experts, our loonie hitting parity with the greenback and surpassing it could cost Canada more than it bargained for. It is “Economics 101” really. More than half of Canada’s healthy gross domestic product (GDP) comes from consumer spending. That same consumer spending was, and still is, the main reason why our economy has been sustaining its respectable, if not robust, growth rate in recent years.

According to Sal Guatieri, a senior analyst with BMO Nesbitt Burns, “There appears to be a tremendous cost advantage to shop in the U.S. It will persist until either the Canadian Dollar comes down or Canadian income growth weakens significantly.” In the short term, chances of either happening are still small.

Canadians are not “flying high” on their loonie just to the U.S. The number of overseas travelers is also on the rise. Just to give you an idea of how strong this trend really is, so far in 2007, the number of trips by Canadians has hit and surpassed 600,000. According to Statistics Canada, before 2007, the number of trips never reached the magic number of 600,000.

Although we would have expected a decline of inbound trips to Canada, it is decidedly not so. Foreign visitors are swarming our fair land, too, whereby overall travel increased 2.4%, totaling almost 2.6 million inbound trips in August. Even U.S. inbound travel recovered from the hits taken in July, increasing on average 2.8%. Finally, the best results for the month of August came from Mexico, as inbound trips increased 5.8%, in sharp contrast to China, which reported the largest decrease in inbound travel, as it dropped to 3.4%.

Leaving inbound travel aside for the time being, it comes as a no surprise that Canadians would become sick and tired of the retailers alleging sticky prices (this is a bona fide economic term when prices refuse to budge under supply/demand pressures) for not recognizing the loonie’s rising star. As more and more domestic consumers are traveling outside the country’s borders in pursuit of better deals, these blatant slaps in retailers’ faces should be sufficient to wake them up from their dogmatic stupor.