Lower loonie, low rates the key to Canada's growth: CIBC

Jobs Friday was ushered in with some disappointing numbers on the U.S. employment front.

On the surface it doesn’t look too terrible: 142,000 jobs added in August.

But the gains were well below the 225,000 estimate that economists had expected. In all, the unemployment rate dropped to 6.1 per cent from 6.2 per cent in July.

But isn’t this Canada? Why pay so much attention to what is happening across the border?

Of course, it’s no secret that our economy is closely tied with the massive engine that is once-again revving up next door after a bleak few years.

Today’s jobs’ news aside, most experts are banking on the U.S. economy continuing to improve, pulling Canada’s right along with it.

Canada’s economy saw 3 per cent growth in the second quarter, and likely to see the same again in Q3.

“That’s quite a bit stronger than we’ve been seeing over the past couple of years where we`ve been running at or slightly below two per cent,” said Robert Kavcic, senior economist with BMO.

Taking a longer view, growth is expected to peak at 2.5 per cent in 2015.

The momentum is attributed largely to a pickup in exports, though, as the Bank of Canada noted in its latest monetary policy report, that will have to be sustained for some time before it will translate into business investment and local job creation.

Meanwhile, consumer spending and residential construction has been better than anticipated.

In praise of a lower loonie

The numbers prompted economists at CIBC World Markets to issue their own report this week singing the praises of a cheaper loonie and urging Canadian policy makers to do what they can to ensure the dollar stays low.

Avery Shenfeld, CIBC chief economist and lead author of the report, said all eyes should be on capital spending and exports.

To that end, he said, “There’s no specific FX target, but a weaker Canadian dollar will be a key ingredient in restoring competitiveness and making Canada an attractive place to expand capacity.”

The loonie’s value against the mighty American buck has been a subject of much discussion all year in business circles.

This March saw the dollar dip to under 89 U.S. cents for the first time in more than four years. It has since rebounded up over 90 cents, defying predictions it would sink as low as 85 cents by the summer.

“It has been a fascinating year,” said Camilla Sutton, chief FX strategist with Scotiabank.

Sutton is a firm believer that a weak Canadian dollar is good for the economic backdrop, but said we aren’t likely to see any significant erosion from current levels.

Scotiabank forecasts the Canadian dollar will reach 93 cents by the end of this quarter, and 91 cents by year’s end.

The dollar was trading at 91.86 cents as of Friday mid-day.
The devaluation of the Canadian dollar is generally considered good news for exporters who exchange goods like forestry products and auto parts for stronger U.S currency.

But Glen Hodgson, chief economist with the Conference Board of Canada, said net benefit of the drop in the dollar, is great news for resource-based industries, but is murky, at best for many others that import high-cost items such as machinery and equipment from south of the border.

Deliberate efforts to influence the loonie, “may end up hurting sectors you don’t really want to hurt.”

CIBC report co-authors, Benjamin Tal and Nick Exarhos, wrote that an improving economy stateside has already started to help Canadian exports.

"Geography always makes the U.S. key to Canada, but America’s outperformace vs. other G-7 countries is enhancing that dependence. In fact, exports destined to the U.S. market are already growing at a near 17 per cent year-on-year pace, while those destined elsewhere up by just under 11 per cent," they wrote.