“The exchange rate is the most important price in the economy” is a quote often attributed to Robert Mundell, the Canadian-born, Nobel Prize winning economist. The dollar’s price is so important because it affects everything from the inflation rate, to the propensity of Americans to vacation in Canada, to the competitiveness of Canadian exports in foreign markets.
For the past five years, our exchange rate has been one of the biggest issues in Canadian economic policy. There is probably no advanced country in the world that has experienced such wild shifts in the value of its currency as Canada has recently.
Four years ago our dollar reached parity with the greenback. At the time this was seen as a major problem, particularly for manufacturing firms that exported to the U.S. It led NDP Leader Thomas Mulcair, among others, to claim that Canada suffered “Dutch Disease,” basically the notion that the dollar tracks the global price of oil, and this is bad news for the non-oil tradable sectors when the price of oil is high.
In an effort to quell the Dutch Disease hysteria, then Bank of Canada Governor Mark Carney asserted that the Canadian dollar was not a petro currency. “It is far too simplistic to talk about the Canadian dollar as a commodity currency, let alone a currency that moves consistent with one commodity. This is a much more diverse, complex economy than that,” Carney told a press conference in 2012.
Fast forward to 2016, when the Canadian dollar is now at risk of dropping below 70 cents. In lamenting the low state of the loonie today, current Bank of Canada Governor Stephen Poloz appears to have a different take than his predecessor. Poloz has conceded that we in fact have a petro currency. “It’s not a coincidence that the Canadian dollar today is about where it was back in 2003, 2004. Oil prices are also about where they were back then,” Poloz told an Ottawa audience in January. Poloz has also said that when you plot the Canadian dollar and the price of oil on a graph you see train tracks.
How can we square these two divergent views on the dollar from two central bankers?
Carney’s message was probably aimed in part at those who trade our currency, admonishing them for failing to understand the complexity of Canada’s economy when they make their decisions about buying and selling the loonie. Poloz, by contrast, was pointing out that it sure looks like our dollar’s value tracks the price of oil, whether that makes economic sense or not.
Both are right. The trouble for Canada is that we have a global image problem that doesn’t align with economic reality. The loonie rises and falls with the price of oil not because ours is a petro-economy but because the world thinks it is.
Back in 2002 when global commodity prices were low, the Canadian dollar threatened to crash below 60 cents. This resulted in an effort by government ministers and senior officials to try to convince global banks that they misunderstood the Canadian economy and should not trade the dollar based on commodity prices. The evidence then, as now, in support of that thesis was solid, but fell on deaf ears in London and New York. Perception — or uninformed bias — was reality for the foreign banks. Canada’s was a commodities economy, irrespective of what the charts and graphs showed.
This episode should have been a wake-up call for Canada’s leaders. It should have told us we have an economic image problem abroad that has real costs at home because it affects significantly that most important price in the economy, the value of the currency.
But it evidently had no effect on the Harper government. Early on in his mandate Prime Minister Stephen Harper claimed that Canada is, or aspires to be, an “energy superpower.” This, coupled with his government's fixation on pipelines, especially Keystone XL — which put Canada on the Hollywood celebrity map in a way no issue had since the seal hunt — and Harper’s global leadership on climate change recalcitrance, all served to cement an extant international image of a Canadian economy dominated by commodities generally, and oil specifically.
Add to that the fact that the two true Canadian global corporate brands — Nortel Networks and BlackBerry — which had disrupted this conventional image to some degree, and had signalled that Canada was technology rich and economically diverse, either no longer exist (Nortel) or face existential crisis (BlackBerry) today. Not to mention that Ottawa did nothing to arrest the decline of these Canadian champions. It is no wonder then that the global banks that trade the dollar think our economy is commodity-based and ignore evidence or talk from Canadian leaders that suggest otherwise.
Trudeau's economic salesmanship foray at Davos is a starting point in chipping away at Canada’s global brand image problem. But it will take a lot more than talk to fix this disease, which governments in this country are complicit in spreading.
– Eugene Lang is Adjunct Professor, School of Policy Studies, Queen’s University. Philip DeMont is a veteran economics and financial analyst and teaches in the Glendon School of Public and International Affairs, Glendon College