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The Many Consequences of a Falling Loonie

02/10/2015 08:59 EST | Updated 04/12/2015 05:59 EDT
AP

The Canadian dollar has been declining against the U.S. dollar for the last several months. The depreciation of the Canadian dollar has corresponded with the fall in oil price. It has depreciated from CAD$1 = US$0.94 in July 2014 to the current rate of CAD$1 = US$0.80. The decline of the loonie is predicted to have a mixed effect on the Canadian economy; some sectors and industries are expected to benefit from the decline while others may be adversely affected.

The depreciation of the Canadian dollar is forecasted to benefit Canadian exporters. It will lead to a decline in the prices of Canadian exports in the export destinations. This may again lead to an increase in demand for Canadian exports in the export destinations, including the U.S. Higher demand for exports would be beneficial for the export-oriented industries, including the manufacturing sector which is vital for Ontario's economy.

An increased demand may lead to an increase in production of the export-oriented industries that may again lead to expansion and higher employment in these industries. Therefore, this will have a positive effect on Canada's economy and employment, particularly in Ontario where many manufacturing industries operate. Again, exporters to the U.S. will benefit in two ways; the declining loonie will lead to lower prices and, possibly, increased demand from U.S. consumers. Also, the strengthening U.S. economy will encourage its consumers to increase their consumption of various products, including Canadian exports. Overall, a declining loonie and a resurgent U.S. economy are forecasted to benefit Canadian exporters catering to the U.S. market.

The declining loonie would lead to an increase in the prices of imports, including food products. As many fruits and vegetables are imported to Canada, this will increase the cost of living for Canadians, especially for people in the lower and middle income groups who spend a higher percentage of their income on food than their high income counterparts. However, if the loonie remains depressed for a longer time, this may encourage the setting up and expansion of import-substituting industries in Canada.

For example, it may induce new food processing companies to be set up and the existing ones to increase their production capacities. This may help to reduce imports of various products, including processed food, which may stop the increase in cost of living. But, this setting up and expansion of import-substituting industries may happen only in the medium to long term. Again, food exporters may benefit due to the decline in the Canadian dollar. It may benefit cattle growers in Alberta as their exports will be more price competitive in the exports destinations, including the U.S.

The depreciation of the Canadian dollar may have an effect on the tourism industry. As the Canadian dollar becomes cheaper, foreigners would find tourism in Canada increasingly financially lucrative. This may lead to an increase in tourism to Canada, especially by U.S. citizens who, backed by a strengthening U.S. economy, may venture out more to Canada for tourism purposes. An increase in the number of tourists visiting Canada and their subsequent expenditures would benefit the tourism industry in Canada as well as have a positive impact on the other sectors of the domestic economy. This may lead to an increase in employment in the tourism industry and, possibly, related industries like the aviation sector or the hotel industry.

Therefore, increased tourism to Canada may lead to higher employment in some sectors as well as have a beneficial effect on the Canadian economy. However, tourism by Canadians abroad would become pricier due to a declining loonie. This may prompt Canadians to seek less expensive tourist destinations, decrease taking vacation outside the country and encourage Canadians to take more vacations within the country. Therefore, the depreciating Canadian dollar may have a negative impact on Canadian tourism abroad while, possibly, increasing domestic tourism. When Canadians spend more tourism dollars in Canada, it would have a beneficial effect on the Canadian economy.

The declining loonie would make it more affordable for international students to pursue education in Canada. As the cost of Canadian education in another currency will decrease, it will encourage international students to pursue education in Canada. Therefore, this may attract more international students to Canada to pursue their studies. This would again have a beneficial effect on the Canadian economy as the international students would spend and create increased demand for goods and services in Canada. Again, the depreciating Canadian dollar would make it more expensive for Canadians to pursue education abroad. This may lead to a decrease in the number of Canadians going abroad for education leading to lower expenditure in attaining education outside of Canada.

Overall, the depreciating Canadian dollar would have different effects on various sectors of the economy. While the export-oriented sector would receive a boost, it may increase the cost of living for Canadians, especially for those in the lower and middle income groups. Also, the overall effect of the declining loonie would depend on how much the loonie depreciates and for how long it remains depressed.

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