Rising Canadian dollar not hurting Canadian economy despite big manufacturing job losses, finds new CIBC World Markets report
275,000 lost manufacturing jobs offset by 1.5 million gains in rest of economy TORONTO, June 15 /CNW/ - CIBC (CM: TSX; NYSE) - The rising Canadian dollar shows no sign of derailing the national economy as widespread job growth has dwarfed losses in Canada's dwindling manufacturing sector, according to a new report by CIBC World Markets. The report finds that while a fifty-per-cent rise in the value of the Canadian dollar in the last five years has hastened the loss of 275,000 jobs in the manufacturing sector, these losses have had little impact on the overall economy. "What seemed to put parity, or even today's 93-cent value out of reach was the dire implications those currency levels would pose for the country's manufacturing sector," says Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets. "But what's recently pushed Canadian dollar short sellers so offside hasn't been the lack of pain in manufacturing, but how little difference that pain has meant for the overall Canadian economy. "The factory job losses have turned out to be nothing more than a footnote in a Canadian labour market that has seen the creation of one and a half million jobs in the rest of the economy, and now sports the lowest unemployment rate in over three decades." The report notes that within the goods industry alone, job gains in the construction and resource sectors have more than offset losses in manufacturing. In addition, the services industry has added more than one million jobs in Canada over the past five years. Mr. Rubin expects manufacturing's share of total employment will continue to decline with the loss of another 200,000 factory jobs over the balance of the decade. This will reduce the sector's share of total employment to a post- war low of less than 10 per cent of Canada's overall labour force - a number in-line with the U.S. work force. "Like factory sectors in other OECD economies, the fate of Canadian manufacturing was sealed a long time ago, when the tariff wall fell and import quotas were withdrawn," notes Mr. Rubin. "It's been down hill since. And that includes the crown jewel of Canadian manufacturing - the auto industry, once the source of half of Canada's merchandise trade surplus. But both manufacturing employment and the auto trade surplus are rapidly fading benchmarks of a past age that bear little relevance to today's economy and even less for tomorrow's." Canada's trade surplus is as large today as it was five years ago when the dollar was trading below 62 cents American. While non-resource manufacturing exports have suffered, exports of energy and industrial goods/materials have more than compensated, soaring from $120 billion to $200 billion (at annual rates) since 2002. Mr. Rubin believes that there is every indication that energy exports will rise even more dramatically in the future, as oil sand production is scheduled to double or perhaps even triple within a decade. Even at today's oil prices, soaring oil sands production would boost crude exports by some $50 billion over the next decade. Additional support from non-petroleum exports, added to the likelihood of higher prices, should ultimately produce an energy trade surplus double what it is today, rising to 6 per cent or more of GDP. The report notes that, between 2002 and 2006, much of the run-up in the Canadian dollar could be attributed to a weakness in the American currency. The record U.S. current account deficit, which hit 6.5 per cent of GDP last year, has seen value of the greenback drop more than 20 per cent on a trade- weighted basis. This includes a 50 per cent drop against the euro and a near- 40 per cent stumble versus the British sterling. "It's been a different story in 2007, however, with the loonie at the head of the class, outperforming other major currencies," adds Mr. Rubin. "Markets are betting that Canada's yield disadvantage - one of the few forces restraining the currency in years gone by - is due to shrink materially in coming months, with Bank of Canada tightening as well as continued strong capital inflows into the country's resource sector." The report notes that elevated commodity prices, and the capital flows they trigger in Canada's resource sector, look to remain firmly behind the loonie. Since 2006, the Canadian dollar has benefited from over $200 billion in inbound merger and acquisition activity. While action has been frenzied in the resource sector, where former giants like Inco and Falconbridge were taken out, and where Alcan, LionOre and others are now targets, there are even larger capital inflows potentially still ahead in the energy sector. "As the Alberta oil sands become one of the premier locations in the globe to increase privately owned oil production, its ownership will increasingly reflect the world's largest oil companies - entailing significant acquisitions of existing Canadian producers," says Mr. Rubin. "Consider that the combined market cap for four of the largest domestic oil sands producers, at roughly $180 billion, is more than double that paid or offered for the four resource firms. Future acquisitions of Canadian energy firms should not only sustain, but increase, already heightened global demand for Canadian dollars." CIBC World Markets expects the Bank of Canada will welcome the dampening influence of an even stronger currency on both economic growth and inflation. Further job losses in the factory sector will open a bit of slack in today's ultra-tight labour market and a stronger currency will see continued price breaks on imported goods. The bank's research indicates that appreciation in the Canadian dollar will bring core inflation back to the Bank of Canada's two per cent target. The full CIBC World Markets Monthly Indicators report is available at http://research.cibcwm.com/economic_public/download/SJun07.pdf. CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.