BUSINESS

Canadian Dollar's Decline Will Spur Business Growth, But Slam The Consumer

01/25/2014 12:07 EST
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Canadians can soon expect to pay a lot more for everyday items from t-shirts to toothpaste as the sinking loonie hits household goods prices hardest.

The Canadian dollar closed this week at 90 cents U.S. for the first time since 2009, when the country was locked in recession. The already weakening loonie’s plunge accelerated after the Bank of Canada warned it anticipates an era of low inflation, sparking an investor flight from the loonie.

While the declining Canadian dollar will help shore up balance sheets in corporate Canada, it will put a bigger squeeze on your household finances.

Overall, the weaker loonie should be good for the economy — especially for our big business export sector, which stands to see an influx in demand for Canadian goods as a weaker dollar makes them cheaper for foreigners to purchase.

But of course, that also makes it more expensive to import goods, materials and equipment as the loonie is worth less against other currencies.

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Canada had long had a trade surplus with the rest of the world, but fell into trade deficits around the time of the Great Recession, meaning we now import more than we export.

Most of what we import is consumer goods: clothing, shoes, electronics, furniture, food and beverages. If a weaker dollar makes those more expensive to import, it’s a pretty safe to bet those prices hikes will be passed along to consumers.

Meanwhile, most of what we export are resources: oil, lumber, metals and minerals. If a weaker dollar makes them cheaper to sell, it’s pretty safe to bet the profits at some of our biggest resource companies are going to rise.

In 2012, the last full year for which there is available trade data, Canada imported $474 billion worth of goods and exported $462 billion. A weaker loonie should help close that gap by encouraging Canadians to buy less from abroad and foreigners to buy more from Canada.

That looks great on paper for the country, as it could add a few points to our gross domestic product and shore up the bottom line of export-oriented companies, the most successful of which tend to be in the extractive sector.

But it will come at a cost to consumers, many of whom are already grappling with sky-high debt levels.

The drop-off in the value of the Canadian dollar versus the U.S. greenback mostly occurred after Stephen Poloz replaced Mark Carney as Bank of Canada governor, and accelerated since the start of the year, falling more than four per cent in the last month.

The steep decline has invited speculation that the country’s new head banker is purposely driving the value lower in the name of economic growth — a pick-up that would specifically be led by the business sector. Since the economic recovery began in 2009 (also the last time the loonie was more than 10 cents cheaper than the U.S. dollar), it has been led by consumers.

The Canadian government has repeatedly called on businesses to pick up the slack on investment, and the falling loonie could be the kick that corporate Canada needs.

And likewise with consumers: The government has been warning households to rein in their debt, which has been hitting record highs in recent years, and a softer loonie may be just what Canadians need to rein in the borrowing binge.