In early May last year the Canadian dollar was trading near parity with the US dollar. Between May and mid-October it fluctuated between 99 and 96 US cents per Canadian dollar. In November the Loonie started on a more definitive downward trend and by early 2014 it had fallen sharply to about 91.5 US cents. This relatively rapid decline hurts Canadian residents inclined to shop in the US, snowbirds and residents vacationing south of the border. But on balance, the fall in the Loonie is good news for BC in an overall economic sense.
The Canada-US exchange rate can be thought of as one of the most important “prices” in the economy; particularly in the highly integrated North American economy, it affects almost all elements of the Canadian economy. For BC, the most significant positive impact of a weaker currency is seen in the export sector. Exporters selling goods and services into the US marketplace now have an effective price reduction of nearly 10%, making their products more competitive. Companies selling commodities priced in US dollars, such as lumber and pulp, now receive an additional 10% when they convert their revenues back into Canadian currency. Considering that last year BC shipped around $15 billion worth of merchandise into the US, the lower currency will have a sizable positive impact. The film and television industry is also a clear beneficiary of a weaker dollar; for this sector, the decline is especially welcome as it helps to attenuate the erosion of its North American competitiveness due to the elimination of the HST.
Tourism is another sector where BC will benefit. The number of Americans coming to Canada steadily dwindled over the past decade. Increased security and border delays and the 2008-09 recession were among the contributing factors, but a Canadian dollar at or above parity also played a role in deterring Americans from coming to BC. With the lower dollar and the US economy recovering, more Americans will be spending time in BC in 2014. On the flip side, the decline in the Loonie will keep some more Canadian travellers at home.
Cross-border shopping, especially for gas and a number of staple grocery items, has increased dramatically in recent years as the dollar steadily strengthened. With the weaker Canadian dollar we expect some cross border shopping to be curtailed. While this will pinch some BC household budgets, many retailers in close proximity to the border should see an increase in business and the broader BC economy will benefit if there is less “leakage” of retail spending to the US.
The downsides of the weaker dollar include the fact that it results in higher prices for some consumer goods, especially things such as produce and other food items. In addition, machinery and equipment and many other business inputs imported into Canada from the US will be more costly. This may cause some companies to delay making productivity-improving upgrades to their equipment.
On balance, however, the lower dollar is good for our economy. Even the provincial government will benefit. Modelling done by the BC Ministry of Finance shows that for every one cent decline in the Loonie, via the positive channels noted above the provincial government will realize between $25 and $50 million in additional revenue. At a time of sluggish economic growth and weak job creation, the drop in the Loonie is actually welcome news for BC.