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Canadians’ standard of living isn’t growing as quickly as per capita gross domestic product (GDP). The reason: our dollar has been declining against the currency of our biggest trading partner, the United States.
While some of that is because the U.S. dollar has risen against most currencies around the world, a lot of it is because of things we’ve done to ourselves. According to The Economist, Canada’s GDP per capita is about US$47,640, 74.5 per cent of that of our American cousins (US$64,070).
The last time the loonie traded at par with the U.S. dollar was Feb. 8, 2013. It’s tempting to blame the subsequent decline on the price of oil, Canada’s major export commodity. However, while the price of oil, as noted by the U.S. benchmark West Texas Intermediate, hit $108.64 per barrel on Sept. 3, 2013, it was only about $97 in February and the big drop in the price didn’t start until later in June 2014. Since then, it’s been a rocky slide for the loonie.
If oil isn’t the only reason for the loonie’s swoon, then some other factors must be at play.
Currency rates are set by supply and demand.
There are a number of constituents of demand:
- exports of our products and services, including tourism and other foreign visitors;
- short-term interest in our securities, including money market and other interest-rate sensitive securities;
- and longer-term interest in investing in our stocks, bonds, real estate, mortgages, loans, businesses and other assets.
Our current account, including net exports and investment income, has been negative since 2014. The capital account (longer-term flows) and the exchange rate have to balance this.
We can increase demand for exports by developing new and attractive products and services, lowering prices of existing ones, or producing more and selling more into more markets.
Unfortunately, Canada has not been good at this. There are few entirely new products produced.
Meanwhile, oil sands bitumen and natural gas have been crowded out by shale production in the U.S. When the loonie was last at par, we were selling all the oil and bitumen we could produce to the U.S., and at much higher prices.
Those higher prices may never come back but the volumes sold could increase, if we had pipeline capacity to the south, east and west.
The loonie is also weak because there’s little interest in investing in this country. The biggest companies are in energy, mining and banking. With better alternatives in other countries, those Canadian sectors aren’t attractive.
Canadian mining companies have to compete for money with others around the world, where getting projects approved, permitted and developed to the commercial stage is faster and cheaper, if not always as safe.
Canadian investors are voting with their dollars. According to Global Affairs Canada, from 2013 to 2017, foreign investment in Canada grew by about $135 billion, an average of about $27 billion per year, whereas investment abroad by Canada-based investors grew by a whopping $343 billion, or about $69 billion per year.
For 2018, the trend continued, as foreign investment flowed in at $51.3 billion and Canadian investment moved outward at $65.4 billion.
If capital accounts are negative and short-term accounts are negative, with lower interest rates here than in the United States, and a negligible or often negative trade balance, there will continue to be downward pressure on the loonie.
Investors have to believe that rates of return, if not robust now, will become so in the near future and have a high probability of being sustainably high.
While Canada’s population growth is good, at over one per cent per year, its productivity growth is meagre, at less than one per cent per person per annum. From this, increased profits and improved wages and living standards are nearly impossible.
In the mix add regulations that increase costs and lengthen times to start or expand businesses and projects; increasing opposition from environmental and Indigenous groups and landowners to resource, industrial or real estate projects; and high corporate taxes in comparison to the U.S.
Ultimately, then, it doesn’t look like a Canada-U.S. currency parity is imminent.
But the federal government could improve Canada’s tax competitiveness with comparatively little harm to the federal deficit.
It needs to tax corporate income after capital expenditures, as the U.S. does, to boost capital spending and productivity.
It could also cut corporate tax rates by 0.5 per cent a year for the next 10 years – the gradual approach Quebec has taken.
The business-friendly governments now in power in most of Canada’s provinces could chime in, making the total average rate in the nation even lower.
Lower tax rates, with more capital investment, are crucial to increasing productivity, wages and living standards.
Reducing or eliminating the cost-boosting carbon tax would help even more.
And businesses and consumers should be encouraged to increase energy efficiency and substitute clean, cheap, lower-CO2-emitting natural gas.
Nobody has to invest in Canada, including Canadians. We need to make it more alluring now and in the future.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.
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