December 7, 2004
400,000 Canadian manufacturing jobs at risk from high dollar – study
Toronto, Ontario – Canada’s manufacturing industry will shed over 400,000 jobs by 2007 if the Canadian dollar stays at current levels, according to a study released today by the Canadian Auto Workers union.
The study, by CAW economist Jim Stanford, examined historical evidence on the link between the exchange rate and Canadian manufacturing employment. A clear statistical relationship exists between the level of the dollar and Canada’s share of North American manufacturing employment – but the full effect of changes in the exchange rate are felt only after significant time lags.
Based on that historical evidence, Stanford projects that the Canadian manufacturing industry will lose over 400,000 jobs by 2007 if the exchange rate is maintained at 85 cents (U.S.).
The study also highlights Canada’s unique vulnerability to the falling U.S. dollar. The Canadian currency has risen against the U.S. dollar by more than any other major U.S. trading partner over the past two years. Yet Canada’s economy is more dependent on U.S.-bound exports than any other economy in the world. The combination of exposure to U.S. trade, plus a particularly sharp appreciation, implies that Canada’s economy is 12 times more vulnerable to the falling U.S. dollar than the Euro zone countries, and 19 times more vulnerable than Japan and the U.K.
“If there is one central bank in the world that should be acutely concerned with the appreciation of its currency against the U.S. dollar, it should be Canada’s,” the study states. Yet Bank of Canada officials have been less aggressive than other central banks in attempting to offset the potential effects of currency fluctuations, with Bank of Canada Governor David Dodge suggesting recently that our dollar’s rise might be “appropriate.”
The study compares the impact of the current appreciation of the dollar to the effects of the previous postwar appreciation episode (which lasted from 1986 through 1991). Already the impacts of the rising dollar on exports and manufacturing employment are worse than in that earlier episode. “Given the time lags involved in adjusting to exchange rate changes, it is quite wrong to conclude that Canada’s economy has adapted successfully to the higher dollar,” Stanford said. “If anything, the evidence to date suggests that the fallout of this appreciation will be worse than what we experienced in the early 1990s.”
Stanford argued the Bank of Canada must hold rates steady at its interest rate setting meeting tomorrow to ease upward pressure on the loonie, and should be prepared to quickly unwind earlier interest rate increases if labour market and export data continue to indicate a weakening of Canada’s economy.
The full study: