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Shrinking Canadian Dollar a Boom for Manufacturing

Updated: Oct 14, 2020

It may be messing with our plans to travel south of the border, but the decline in the Canadian dollar will almost certainly produce a significant spike in this country’s manufacturing activity.

Eroding currency lowers the costs of a country’s manufacturing exports in foreign markets. Canada’s share of the North American manufacturing output peaked between 2000 and 2002, when the currency was at its weakest.

A report released this month by CIBC World Markets predicts that the lower Canadian dollar will help draw new manufacturing plants and jobs to this country. It is one among many that have come out in the last few months, coinciding with the loonie’s slide.

But all of them caution that the more competitive exchange rate’s impact on manufacturing will not be immediate.

In a research note published last year, Bank of Montreal chief economist Douglas Porter predicted that the lag would be at least three months and could be as long as 18. But “the best estimate is that a 10-percent depreciation in the Canadian dollar will ultimately boost Canadian manufacturing activity roughly three percent.”

In their January 2015 report, CIBC economists Avery Shenfeld and Andrew Grantham predicted that “we will need to sustain an 80 to 85 cent Canadian dollar for several years to come for all of the benefits to show through in our factory sector.”

Still, it’s reasonable to assume that there are gains in the offing for this sector, which suffered significantly over the recent economic downturn.

Since 2002, U.S. manufacturing output has increased by 13 percent, while Canadian output shrank by 10 percent. A study published by Boston Consulting Group in 2013 reported that Canada’s manufacturing costs were about 15 percent more than those in the U.S., based on a 95-cent Canadian dollar.

Canada is short on manufacturing capacity right now, having lost about a quarter of its manufacturing businesses between 2002 and 2012. But the CIBC report predicts wins for the industry if the current exchange rate is sustained.

The Canadian dollar, which hovered at or above parity with the American dollar through most of 2012, has now dropped below 80 cents U.S. for the first time since 2009.

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