By Ryan McGreal
Published November 07, 2007
It's just a big ol' jumble of crazy economic news these days.
The Canadian dollar hits $1.10 US, oil futures rise to $98 a barrel, China announces it plans to divest more dollar denominated assets from its forex reserves (with Japan and Sudan following suit), while Saudi Arabia has already refused to cut interest rates along with the desperate Federal Reserve cuts in September and Iran, Russia and Venezuela have all abandoned the petrodollar oil trading system.
An impressive line-up of currency experts believe the US dollar still has plenty of room to fall, since the underlying weaknesses in the US economy aren't changing any time soon, with the US on track to meet an $800 billion trade deficit for 2007.
The International Monetary Fund has cut its forecast for US economic growth in 2008 to just 1.9 percent next year.
How will this affect the Canadian economy?
The standard reasoning among economists seems to be that the strong dollar will hurt Canadian exports and slow our economic growth in the coming year.
Nominally, it doesn't look good. Canada is a net exporter, but over 80 percent of Canadian exports go to the US, accounting for some 45 percent of Canada's gross domestic product and 30 percent of Canadian jobs. Canada exports $360 billion to the US, and its net trade surplus with the US is some $96 billion.
Energy exports (oil - 1 million barrels per day, natural gas - 85 billion cubic metres, electricity - 10 billion kilowatt-hours) account for $87 billion of trade, with another $30 billion each in agriculture and forestry products.
Industrial goods make up $93 billion, machinery and equipment $94 billion, and automotive products $83 billion.
Because US demand for energy and agricultural products is fairly inflexible and supply constraints limit opportunities to source them elsewhere, they are fairly well insulated from the effects of a strong dollar.
The automotive sector, by contrast, faces a double whammy: rising oil costs have reduced demand for highly profitable SUVs and light trucks and the high dollar is rendering Canadian-made vehicles less cost-effective.
The "Big Three" US automakers, softened by lax fuel economy standards and tax and regulatory loopholes that favour cheaply built light trucks, are being hit hardest by high oil prices. Foreign automakers, used to building cars for markets with much higher oil prices, are enjoying a windfall of sales growth as North Americans abandon Ford F-150 'commuter vehicles' for Toyota Corrolas.
(Note to Buzz Hargrove: if you want to save your workers' jobs, you should be lobbying the federal government to make the regulations on automakers stricter instead of lowering interest rates. Years of regulatory mollycoddling is a big part of why the Big Three are in such bad shape to begin with.)
Here's a question: does it make sense to form an economic policy to protect the auto industry from a strong dollar when economic trends suggest that a suburban motoring economy has poor long-term prospects?
Between peak oil and climate change, we should seriously be talking about a post-automobile economy based on rail and shipping goods movement, with personal mobility based on proximity plus light rail.
The collapsing US dollar could be the kick in the pants we need to start shaking off our addiction to easy motoring and long-distance, just-in-time goods trucking.
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