Weaker loonie hurts more than it helps

The negative impact of a weaker loonie will likely outweigh any benefits, says Philip Cross, former chief economic analyst for Statistics Canada, in an analysis published today by the Fraser Institute.

This week the Canadian dollar dropped below US90 cents. Good news, say some economists, for the Canadian economy. Not so, says Cross.

“It’s a myth that devaluation of the Canadian dollar broadly stimulates the economy and leads to prosperity. In fact, a weaker loonie triggers higher domestic prices, which hit consumers in the wallet, and higher importing and financing costs, which hurt businesses and government,” he says.

For example, certain commodities—gasoline, for example—are priced in U.S. dollars. So when the loonie drops, people pay more at the pumps.

Read: BoC considers loonie exchange-rigging

The cost of doing business will also increase. Canadian businesses import 55% of their machinery and equipment. When faced with higher prices, businesses will buy less machinery and equipment, and consequently limit production, which may limit employment opportunities and hurt worker wages.

Canadian governments, meanwhile, will pay more when managing debt denominated in U.S. dollars, particularly provincial governments and their utilities (i.e. natural gas, electricity), which issue the most bonds denominated in non-Canadian currency.

However, there are benefits—though in some cases they’re overstated.

Exporters benefit from a lower exchange rate because they exchange goods for U.S. dollars, so when the loonie is relatively low, those U.S. dollars, when repatriated, buy more Canadian dollars.

Read: A weak dollar may benefit Canada

“But even for exporters, the benefits of a lower exchange rate are likely to be limited, because market demand is the primary driver of exports—not the relative strength or weakness of the loonie,” Cross says.

Moreover, exporters may rely too heavily on a depreciating dollar, which can lead to investments that only make sense with a weaker loonie.

Canadian natural resource industries should benefit most from a lower Canadian dollar. Oil and gas firms, for example, export much more than they import, so a weaker loonie will boost their bottom line.

For individual Canadians, anyone invested abroad will pocket more Canadian dollars when those investments are brought back home.

“But this is a dubious benefit to the Canadian economy because it rewards people for not investing in Canada, and consequently, lowers the value of all assets in the country,” Cross says.

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