07/15/2011 06:11 EDT | Updated 09/14/2011 05:12 EDT

US Economy Threat To Canada, Businesses Must Adapt: Report


THE CANADIAN PRESS -- OTTAWA - Canadian businesses need to redouble their efforts to innovate and diversify their sales if they are to remain globally competitive amid the economic turmoil in the United States, the Conference Board of Canada says.

Conference Board chief executive Glen Hodgson said the change won't be easy, but if businesses want to survive they will have to make plans to compensate for a loonie worth more than the U.S. dollar and the country's biggest export market struggling to grow.

"Diversification away from reliance on the U.S. is not going to be simple for businesses," Hodgson said Friday.

"They may have to think about doing business in a very different way. It's not just a matter of finding somebody else to buy a car. It's getting into the guts of your business model and saying how can I compete with a dollar that is going to be at or above par for we think a very long time to come."

"That's going to mean structural change within how business operates. They won't just be doing the same thing with different clients."

Hodgson said the economic outlook for Canada is generally positive, but the U.S. may be in the midst of a lost decade.

"What's happening right now in the U.S. is just the opening act. This is not the end of the story. It is essentially the beginning of the story and there are going to be a lot more difficult negotiations before the U.S. gets to a stable fiscal position," Hodgson said.

The Conference Board report came as Statistics Canada reported manufacturing sales slipped 0.8 per cent, or $360 million, to $46 billion in May. Lower sales were reported in 11 of 21 industries, representing 71.9 per cent of total manufacturing.

The drop was lower than most economists had expected due to lower auto production, petroleum and coal sales and sharply lower food sales, particularly among dairy food producers.

"Considering the fragile nature of the US economic recovery, not to mention the strong Canadian dollar, we still foresee a continuation of the gradual recovery in manufacturing," economist David Madani of Capital Economics said.

Hodgson said that with defence, medicare, medicaid, social security and interest payments making up more than three-quarters of U.S. government spending, there will be no pain-free way for the U.S. to deal with its deficit estimated at more than $1.3 trillion a year.

The talks to increase the U.S. government debt ceiling are only the beginning of what will be a difficult road back to a balanced budget, he noted.

"This is not the end of the story. It's actually the beginning of the story and there are going to be a lot more difficult negotiations before the U.S. gets to a stable fiscal position," Hodgson said.

But while the U.S. economy continues to sputter, the Canadian economy appears on track and that means short-term interest rates will rise putting upward pressure on the loonie and hurting companies that depend on U.S. markets, which account for roughly 70 per cent of Canadian exports.

The Canadian dollar closed Friday up 0.73 of a cent to 104.79 cents US as lawmakers in the United States fought over raising the country's debt limit.

The Bank of Canada is expected to keep its overnight target rate at one per cent next week, but governor Mark Carney is expected to start raising the trendsetting rate later this year.

"As you start increasing rates in Canada, it is going to put even more upward pressure on the dollar and make the adjustment that much harder for business," Hodgson said.