The lower loonie will help draw new manufacturing plants and jobs to Canada, but that will take time, according to a report by CIBC World Markets released on Wednesday.
“Expect a lag between new factory investment and our now more competitive exchange rate. As a result, 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,” CIBC economists Avery Shenfeld and Andrew Grantham noted in the report.
A study by Boston Consulting Group published last year showed that Canada was on average about 15 per cent more expensive in manufacturing costs than the U.S., CIBC noted. But that analysis was based on a 95-cent Canadian dollar.
“Recalibrated to today’s exchange rate, the gap virtually disappears,” CIBC wrote.
Oil prices have fallen by about 50 per cent in the last six months as a glut of supply crashed over shrinking global demand.
That steep drop has also pulled down the value of the Canadian dollar. The currency spent most of 2012 at or above parity with the U.S. greenback, but began declining in 2013. It now trades around 83 cents (U.S.).
The loonie is likely to stay near this level for most of 2015, rising to 87 cents (U.S.) by the end of the year, Rahim Madhavji of Knightsbridge Foreign Exchange said in an interview.
“There is a lot of oil price volatility right now, but it won’t last forever,” Madhavji said. “Our thinking is that by the end of the year, the Canadian dollar will appreciate.”
The decline in the Canadian dollar could prove attractive to manufacturers that are looking to build new plants or those looking to expand existing ones, the CIBC report said.
Canada and the U.S. are currently facing a dearth of spare manufacturing capacity, the report noted.
“As demand continues to grow, at least within the continent, decisions will be coming up soon on new plants or expansions of existing facilities,” CIBC said.
“In that geographic beauty contest, the current level of the exchange rate, if sustained, should significantly enhance Canada’s ability to win its fair share of mandates.
Canada lost about one-quarter of its manufacturing businesses from 2002, when the dollar lingered in the 60-cent range, to 2012, CIBC said. Many closures came in the aftermath of the Great Recession of 2008.
Workers from the industry have moved on, to lower-paying jobs in the service or retail sector or, geographically, to places like Alberta which have benefited from the oil industry boom. Older workers may have retired, leaving the workforce completely.
As a result, “further growth in factor output will need investments in human resources — training and education — as well as capital spending,” CIBC said.
The wave of plant closures was so significant that it has been a hurdle to winning new manufacturing business.
“The period of retrenchment in Canadian manufacturing after 2005, one that predated the recession, featured so many permanent closures, that winning new plant mandates is now a major hurdle that will stretch out the recovery’s timetable,” the economists said.
The report also cautioned that in some sectors of manufacturing, regaining that lost economic momentum will be a challenge.
In the automotive sector, “parts plants decisions have been impacted by the southward shift in the geographic centre of the assembly industry with Mexico and southern U.S. gaining share,” the report said.
Other examples include plummeting demand for newsprint, which will prevent the paper industry from ever returning to boom levels, and textile and apparel manufacturing, which continue to be challenged by low-cost producers overseas that benefit from free trade access to the Canadian market.