Will a low Canadian dollar actually help manufacturers?

Canada’s manufacturing and export landscape has changed since the last time the loonie was low for a prolonged period

Worker assembling auto parts

A Magna International auto-parts plant in 2013. The manufacturing landscape has changed enough that a lower loonie may not have the power to drive exports the way it once did. (Moe Doiron/Globe and Mail/CP)

Canada and Greece have about as much in common as maple syrup and olive oil. The snowier country is overly obsessed with balanced budgets, while the Mediterranean one is paying a heavy price for decades of profligacy. But there is one thing the two countries share: both will be leaning on tourists to help them out of their economic doldrums.

This isn’t new for Greece. Its beaches long have been the centre of its economy; filling them will be crucial to the country’s economic recovery. The sight of Canada—a big, diversified economy based on oil, grain, banking and automobiles—looks somewhat desperate. Yet it was tourism that the Bank of Canada recently held up as evidence that better days were at hand and that its ultra-low-interest-rate policy was working.

Neither conclusion was obvious. The release of the central bank’s latest quarterly report on the economy showed policy makers now expect gross domestic product contracted in the first half of the year, forcing them to cut their growth forecast for 2015 to 1.1% from 1.9% a few months ago. That would be the weakest growth outside a full-year contraction since 1992, according to International Monetary Fund data. Rock-bottom borrowing costs and a weaker currency have done nothing to lift total non-energy exports—an uncomfortable fact that Bank of Canada Governor Stephen Poloz admitted was a “puzzle” that will require study.

Have faith, the central bank advised. Industries that do well when the dollar sinks are showing life. Exports of services, for example, are growing at an annual rate of about 3% compared with 1% two years ago. This is where Canada starts to look like Greece. The Bank of Canada in its quarterly report made a point of noting that the jump in exports of “travel services” has been “particularly pronounced.” At a press conference, Poloz suggested that anyone harbouring dark thoughts about Canada’s prospects should ask their friends and co-workers about their holiday plans. “Try to get yourself a room in [Prince Edward Island] this summer,” he said. The governor’s point: a weak dollar has prompted Canadians to spend their vacation budgets at home, adding to an increase in visits from Americans and other foreigners enticed by a chance to see Canada at an exchange-rate-adjusted discount.

Are long lines at the Anne of Green Gables theme park a harbinger of a turnaround? Maybe. But that assumption is based on a pre-crisis understanding of how the economy works. Poloz himself devoted an entire speech earlier this year to explaining why some of those rules may no longer apply. Will the combination of a weak currency and stronger U.S. demand boost Canada’s economy like it did in the 1990’s? It’s not a given.

The Bank of Canada nonetheless senses a turning point. Its quarterly survey of executives suggests that many are starting to find it difficult to keep up with demand. That should prompt expansion. Non-energy exports might have jumped this year if not for an unusually tough winter than caused the U.S. economy to contract in the first quarter. But hiring there remained strong, suggesting plenty of demand for exports now that the American economy is getting back to normal.

But what if the puzzle is more complicated than that? One of Poloz’s great insights into why Canadian exports struggled even as the rest of the economy recovered from the Great Recession was that too many companies had been wiped out in 2008 and 2009. Exports would only recover as the population of companies recovered. Poloz’s observation assumes that setting up plants and offices to sell goods and services abroad offered the best return on investment. Vivek Dehejia, a Carleton University economics professor, observed last week that the easiest way to make money in recent years has been to ride any number of asset-price bubbles: Why take a risk on selling stuff in foreign markets when a safer profit can be earned by purchasing real estate, farm land or art? “An important side effect of inflated asset prices may well be a diminution of innovation and new business formation—which, in turn, will retard job creation and future growth in productivity, the latter being the chief driver of long-run economic growth,” Dehejia said.

Asset-price inflation is the deliberate work of the central banks, but the ultimate result that Dehejia suggests isn’t what they had in mind. It also is possible that weaker exchange rates no longer provide the automatic benefit they once did. Global manufacturers now seek to be closer to their customers. That means a company such as Magna International does business in multiple currencies. But it reports in U.S. dollars. The company warned in its annual report that weaker Canadian dollar and euro would hurt profits in 2015. Magna, which is based in Aurora, Ontario, has announced a dozen expansions since 2014 in the form of joint ventures, new factories and expanded facilities. Only one of those was in Canada.

But let’s look on the bright side: maybe some of those hundreds of new Magna workers in the U.S., Mexico, India, China and Europe will be tempted to see the country from where their paycheques originate?