The Canadian economy: falling currency, rising competitiveness

09 Mar 2016

Canada’s services sector, in combination with its resources and manufacturing sectors, will eventually revive the ailing economy and generate sustainable long term growth, according to Macquarie Securities North America economist David Doyle. 

Doyle predicts the Canadian dollar will fall to $US0.59 within the next few years.

“Canada has accumulated substantial debt over the past 10 years, and is now facing the consequences.” 

Macquarie’s currency call expects the Loonie to hit record lows. However, Doyle says this is where the currency needs to be valued in order for Canada to become competitive and find its place in the North American supply chain again.

We see most opportunity in the future stemming from the services sector.  

Canada’s structural problems have been driven by domestic economic factors, primarily the country’s long term reliance on unsustainable sources of growth and activity.

“For Canada, these are the same sources of growth and activity that caused issues for the US in 2006: consumer leverage, all-time high household debt, and more and more housing-related investment,” Doyle says.

Adding to this is the dramatic downturn in the commodities market. 

Macquarie’s outlook for the Canadian economy takes into account an expected government fiscal stimulus within the next three months, which will help to offset some of the downside risk on the currency.

Doyle says the rapid growth in Canada’s total debt to Gross Domestic Product (GDP) ratio, from 230 per cent in 2005 to over 330 per cent today, creates “significant headwinds” going forward. 

“Eventually we expect to see a shift and rebalance towards non-energy exports, with renewed growth in services and the manufacturing sector. This is what policy makers and central bankers are looking for,” Doyle says.

“We see most opportunity in the future stemming from the services sector.”  

“Significant growth in the tech space is likely to see many US tech companies setting up facilities in Canada to take advantage of lower costs.” 

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