Weaker loonie to do more harm than good for Canada’s economy?

We all know a weak loonie doesn’t do us any favours when we are snapping up shoes, clothing and groceries across the border.

But, in the bigger picture, the devaluation of the Canadian dollar against that of the U.S. can also be good news for our economy, particularly for our exporters who exchange goods like forestry products and auto parts for the mighty American buck.

Surely, the potential of greater overall prosperity outweighs any negative impact to our personal pocketbook. Right?

Not so, says Philip Cross, former chief economic analyst for Statistics Canada, in a gloomy analysis published Thursday by the Vancouver-based Fraser Institute.

“In fact, a weaker loonie triggers higher domestic prices, which hit consumers in the wallet, and higher importing and financing costs, which hurt businesses and government,” he wrote in the paper, entitled Economic Consequences of the Lower Canadian Dollar.

Cross’s analysis comes just as the loonie dipped to 88.76 US on Thursday, its lowest point in more than four years. Economists predict the dollar will continue to sink in the weeks ahead, possibly as far down as 85 cents by the summer, as the Bank of Canada holds to low interest rates, while the U.S. Federal Reserve appears more hawkish.

U.S. central bank chair Janet Yellen signalled Wednesday the Fed could begin raising short-term rates after it halts its bond purchases later this year, the Canadian Press reported.

“That combo is quite negative for currency,” said Camilla Sutton, chief currency strategist with Scotiabank in Toronto.

The loonie has, so far, fallen more than 5.5 per cent this year.

Economists generally agree it's no picnic for Canadians when the dollar falls. It means we can expect higher costs when we holiday or shop across the border. We also rely heavily on imports from the U.S., and that means higher prices for things such as vehicles, machinery and oil and natural gas, as well as fresh fruit and vegetables, snack foods and red meat.

Let’s not forget commodities, like gasoline, that are priced in U.S. dollars. When the loonie drops, people will pay more at the pumps.

Cross said those hikes will not just impact individuals, but Canadians businesses, which import more than half of their machinery and equipment from south of the border. That, in turn, could translate to lower productivity and may even limit employment opportunities and hurt worker wages over the longer term.

“Canadian governments, meanwhile, will pay more when managing debt denominated in U.S. dollars, particularly provincial governments and their utilities (i.e. natural gas, electricity), which issue the most bonds denominated in non-Canadian currency,” he said.

The winners when the loonie depreciates tend to be exporters and, in turn, the workers they employ.

But Cross argues any benefits reaped by most exporters are likely to be limited because they are driven by market demand and not the relative strength or weakness of the Canadian dollar.

And while the stimulus to manufacturing is already evident, Cross said the leading indicator produced by the Conference Board of Canada shows no lift to the overall economy.

Canadian natural resource industries, including oil and gas firms, will benefit the most from a lower loonie, he said. So will Canadians who are invested abroad and stand to boost their bottom line when the investments are brought back home.

“But this is a dubious benefit to the Canadian economy because it rewards people for not investing in Canada, and consequently, lowers the value of all assets in the country,” he added.

Sal Guatieri, senior economist with BMO Capital Markets, agreed the loonie’s tumble creates a complicated and not-altogether-welcome picture for Canadians.

But he held to the theory, based on history and economic modelling, the overall benefits to the economy will outweigh the negatives, at least over the next one to two years.

Beyond that, he said, “we will need a stronger U.S. economy to pull our economy forward.”

Sutton also held to a distinctly more optimistic viewpoint, noting the loonie's weakness is still relatively new and it may take until later this year for exporters to start feeling the impact. When it does show up, it will be “powerful and positive.”

The U.S. economic recovery is strengthening the U.S. dollar, she said, and that will bring relief to our long-suffering manufacturing sector, as well as resource and energy sectors.

“Should I be wrong it is a miserable picture for Canada,” Sutton said.