Dollar expected to drop

Further decline of the dollar the only hope for the Canadian economy?

Just a couple of weeks ago we mentioned the different ways of stimulating developed economies and reviewed comments by Carol Wilkins, the Bank of Canada’s senior deputy governor, who suggested that European economies try adjusting currency exchange rates as a way to stimulate growth given that monetary easing strategies seem to have exhausted their effectiveness. Only two weeks later, similar suggestions are being aired about the Canadian economy.

Canada’s GDP dropped by 0.7% and 0.3% in the first and second quarter of this year and then climbed by 2.3% in the third quarter. However, there are questions about the longevity of this growth as in the last month of the quarter, in September, real GDP fell by 0.5% following three consecutive monthly increases. Then, the job numbers came in and there were 35,700 jobs lost across Canada in November, and the unemployment rate grew to 7.1% as compared to 7.0% in October.

Although the bulk of the economic decline in September happened in the extracting industries, the Canadian manufacturing also dropped, by 0.6% in September. After oil prices started declining in mid-2014, the Canadian dollar went from 94 cents (US) to around 75 cents (US) now. This weakness has been occurring for more than a year now and that the Canadian manufacturing is still quite fragile is quite revealing.

Many people are saying that high electricity rates in Ontario are preventing a more robust growth for manufacturing even though the loonie is low. JPMorgan Securities recently stated that the Canadian dollar has lost its competitiveness. That the low dollar may not be low enough to boost manufacturing and the economy as a whole is also evident by the 1.8% drop in Canadian exports in October which helped widen Canada's trade deficit to $2.8 billion.

There are many forecasts for further dollar decline right now. Merrill Lynch expects that the loonie will drop to as low as 74 cents (U.S.) next year, Bank of Nova Scotia’s forecast is at 72 cents while Morgan Stanley analysts expect that the Canadian dollar will fall to 0.69 US over the next 12 months. With interest rates in Canada already fairly low, there may not be many other options to help stimulate economic growth in Canada.

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