Since the turn of the year, Canadian news media have been playing scary headlines crying about the free fall of the loonie.
These headlines read like these: “As loonie sags, pressure mounts on Ottawa to act” – Toronto Star, Jan. 13, and “Stock markets tumble as loonie falls to new 13-year low.” – CBC News, Jan. 13.
The loonie, as the Canadian dollar is known for the image of the aquatic bird – loon – on the $1 coin, kept falling since the first trading day of the New Year for four straight days, touching the 12-year-low range of $1.41. The following week, Canadian dollar further fell to 69.71 cents on Jan. 13 – the first below-70-cent level in almost 13 years since April 30, 2003. This means one loonie buys 69.71 U.S. cents. (Toronto Star, Jan. 13)
Incidentally, loon, or more precisely Common Loon, has been popularly regarded as Canada’s national bird since its image is one the Canadian $1 coin, but it is not official. And National Bird Project is now underway to elect its official national bird prior to Canada’s 150th birthday in 2017. Common loon is easily leading other birds in the Web contest.
The continuing tumble in oil prices is the main culprit behind the steady fall in the loonie. Prices for crude oil, Canada’s largest exports that have supported the country’s economy, have been falling amid the worldwide energy price falls since last year, and on Jan. 13, fell to US$30.48 per barrel, the 12-year low. (CBC News, Jan. 13) Oil prices plunged below $30 level to $29 and no end is seen as of this blog’s writing.
Natural resources account for 20% of Canada’s GDP, with crude making half of them, while natural resources account for half of Canada’s total exports revenues. Therefore, needless to say, sharp declines of export prices for natural resources, including oil prices, will have a great negative impact on the Canadian economy. The global stock price collapses, triggered by the Chinese market crash and financial crisis, have also sent Canadian stock markets tumbling, making the matter even worse.
Alarmed by the prospects of further deteriorating economy, Canadian economists are now urging the Liberal government to consider deficits even deeper than those it has promised to further stimulate the slowing economy.
Prime Minister Justin Trudeau has already indicated that his government’s first budget beginning in April could feature a deficit that exceeds the C$10-billion-a-year cap the Liberals promised during the fall election campaign, but has declined to speculate how much larger the fiscal deficit might be. (Globe and Mail, Jan. 14)
The chief economist of CIBC World Markets, Canada’s major bank, said the government should be considering a deficit as large as $30 billion, not a meager $10 billion the Liberals have promised. Avery Shenfeld estimates that a $30-billion deficit would add about half a point to economic growth. (Globe and Mail, Jan. 14) If not $30 billion, many other private-sector economists call for deficit spending exceeding well the $10-illion ceiling.
The government is reportedly looking at speeding up or fast-tracking infrastructure projects and enacting measures to spur energy-efficiency retrofits of buildings and homes to kick-start the Canadian economy, beset by collapsing oil prices and the tumbling Canadian dollar. During the campaign, the Liberals promised to spend $60 billion over the next decade on infrastructure, allowing mild deficit, to bolster the slumping economy, but only $17.4 billion was earmarked for the next four years – the first term.
Leaders in the government believe that front-loading the planned short-term infrastructure spending – public work projects that can pump cash into the economy over short terms and create jobs across the country – is the needed quick method, rather than the longer-term approaches to enhance productivity and promote innovation. Particularly, speeding up infrastructure spending on transit and social housing, as well as energy-saving retrofitting of large commercial buildings are among the priority ideas being considered by the government, according to Globe and Mail (Jan. 14).
On Jan. 18, the Federation of Canadian Municipalities came to the aid, a sort of, for the Liberal government with a timely survey report that found a third of Canada’s municipal infrastructure is at risk of “rapid deterioration,” including some 40% of transit infrastructure that needs repair. The report said that much of Canada’s municipal infrastructure – municipal roads and bridges, public transit, buildings, among others – “is at a critical juncture.” (Toronto Star, Jan. 18)
The budget prepared by the Conservative government for the current fiscal year last April assumed the economy would grow 2% in 2015 and 2.2% in 2016. The Liberal government revised the forecast downward, after hearings on private-sector economics conducted in October, to 1.2% for 2015 and 2% for 2016. Those economists are now expecting economic growth to further decline.
Canada’s media and industries seem to be playing up more about negative impacts of the looney’s declines, less talking about positive sides for the country’s manufacturing and export sectors, centering in Ontario. A further depreciation of the loonie would make Canada more competitive against lower-cost producers such as Mexico in competition for winning larger export shares and attracting more foreign investment. Toronto Star (Jan. 13) pointed out, however, “It’s unclear whether the loonier will be able to stimulate the export sector as it has in the past. There has been a fundamental shift in the dynamics of that crucial industry due to the closure of 10,000 export-oriented businesses in the past decade alone.”
The Japanese yen has fallen 20% against the U.S. dollar during the three years under “Abenomics,” bringing huge positive effects to the slumping Japanese manufacturing and export sectors. It may be easy to imagine how big benefits the cheap loonie would bring to Canada’s manufacturing and export sectors. But it is yet to be seen if the cheap dollar will work as it should.
Prime Minister Trudeau left for Davos, Switzerland, on Jan. 19 to meet world political, business and opinion leaders at the annual high-profile World Economic Forum meeting – amid expectations and pressure to act on the troubled Canadian economy.
By Yoshikazu Ishizuka, TOCS Senior Consultant