Strong Canadian currency value hurts manufacturing but helps construction
John Clinkard
It is widely-recognized that the 50% increase in the value of the Canadian dollar versus the U.S. dollar over the past five years has created major challenges for Canada’s exporters.
However, over the same period, the unemployment rate in Canada has fallen to a 33-year low and the employment rate (the percentage of the working age population with a job) has reached an unprecedented high.
These developments suggest that despite the drag of the appreciating Canadian dollar, the economy as a whole has fared quite well. Clearly, while some industries have been hurt by the strong currency, others have benefited.
The extent to which industries have gained from the appreciation of the currency is a function of their degree of export dependency. Industries that import a large portion of their inputs and export little clearly benefit from the stronger exchange rate when compared to firms in industries that export most of their output and import little.
Based on research done by Z. Ghanem and P. Cross and reported in the Canadian Economic Observer, the strong dollar has benefited the construction industry more than any other. This is because construction firms, on average, import approximately 11% of their total inputs, while they export almost none of their output — houses, office buildings, roads, sewers, etc.
Industries with a high degree of export dependency, (i.e., exports 20 percentage points higher than material imports), such as transportation equipment, metal manufacturing, and machinery and equipment, have seen revenues decline due to the strong dollar. However, most service industries, including personal care and repair services, financial services and government services — together they account for over 30% of the economy — are also largely unaffected by the exchange rate, since they export almost none of their output.Based on Ghanem and Cross’ analysis, it appears that, while the degree of export dependence is a significant factor in determining whether an industry will gain or lose from a stronger Canadian dollar, other factors that are industry-specific also have a major impact.
