In its just-released Monetary Policy Review, the Bank of Canada expressed considerable concern that “the persistent strength in the Canadian dollar is working to slow growth and to subdue inflation pressures” and “the current strength of the dollar is expected, over time, to more than fully offset the favourable developments since July.”

While the report does not spell out what those “favourable developments” since July have been, it does raise some serious concerns. While it is possible that the strong Canadian dollar may be a drag on the economy next year, a number of factors suggest that it won’t.

First, as noted in a recent report by Dundee Capital Markets, the recent strength of the Canadian dollar is in large part due to improving global fundamentals and an increased appetite for commodities, the benefits of which will flow into Canada’s resource sector.

Also, the structure of the Canadian economy has changed over time with the result that GDP is much less dependent on goods-producing industries such as manufacturing than it has ever been in the past. For example, over the past three years manufacturing’s share of overall GDP has fallen by an estimated 25%, from 16% of total output to just over 12%.

A third positive effect of a strong Canadian currency is that it strengthens consumers’ purchasing power by reducing the cost of imported goods as well as contributing to an increase in employment and output in both retail and wholesale industries.

It is also worth noting that during periods when the Canadian dollar was relatively strong ($0.95 US) versus the U.S. dollar – between 1960 and 1978, for example – the Canadian economy grew considerably faster (3.5% per year) than that it did during the period 1979 to 2004 (2.8% per year) when the currency was weaker ($0.76 US).