Canada, by the numbers

The Loonie is up, unemployment and exports are down, so something has to give - we can't keep going this way

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The Gazette, Wednesday, November 7, 2007

Here are three numbers to consider: Oil at $94. The loonie at $1.08. And unemployment at 5.8 per cent. Welcome to the good times, except in exports to the United States.

There aren't very many analysts in the oil patch, or in the financial districts of New York, London or Toronto, who ever predicted the price of oil would go to $100 a barrel. That's in U.S. dollars by the way, which ought to make gas cheaper at the pump downstream in Canada, but doesn't.

Gwyn Morgan, who was named CEO of the year when he was running EnCana in Calgary, remembers sitting down with an academic a few years ago when oil was still selling in the 30s. The analyst crunched a number where he thought the Western economies could sustain no further increases, and came out at $71 a barrel.

Approaching $100 a barrel, the exploration and oil companies are going to be posting even bigger profits, and paying even more corporate taxes to Ottawa, one of the big reasons the feds are awash in cash. The whisper number on this year's surplus is at least $20 billion.

The commodity boom, and the price of oil in particular, is what's been driving the Canadian dollar to an all-time high. If you did two lines on a chart, tracing the price of oil and the value of the loonie this year alone, you would find they track very closely together. After bottoming out at around $52 at the beginning of the year, the price of oil has rocketed to the mid-90s. And the Canadian dollar, which was thought to be pretty fully priced at 85 cents back in January, crossed $1.08 briefly yesterday, hitting a new all time high. That's a 21-per-cent appreciation relative to the U.S. dollar in only 10 months. Wow.

Only six years ago, the loonie was languishing in the low 60s, back when oil was in the low 20s, which only makes the point. "They are very closely linked," says Jeremy Leonard, an economist with the Institute for Research on Public Policy.

Nothing, it seems, can stop the dollar, so long as nothing can stop the price of oil.

Not even David Dodge can slow the flight of the loonie, and he's the guy whose signature appears in the right hand corner of our paper money. Last month we witnessed an extraordinary occurrence: Dodge, the head of our central bank, tried to talk down the dollar. For one day, the markets heeded his warning that the Canadian dollar was overpriced on fundamentals. Then, irrational exuberance, as Alan Greenspan once called a bull market, took over again.

Last Friday alone, the Canadian dollar added about two full cents in a single day, mostly on the news of a report from Statistic Canada that unemployment had dipped to 5.8 per cent, its lowest level in three and a half decades. Anything under six per cent is regarded as full employment - a job for everyone who wants one, and we are there now.

But here's where these numbers might begin to turn in another direction.

With the loonie at $1.08, and especially given its rise by 22 cents this year alone, that's a considerable hardship for Canadian manufacturers and exporters. Some industries, such as forestry, are in the throes of a major crisis. The exchange rate, and the crash of the housing market in the U.S., have created a perfect storm in the forestry sector.

As for exporters, it is extremely difficult for them to price in a 21-per-cent appreciation of the Canadian dollar. Operating margins on their exports to the U.S. are disappearing

Exports to the U.S., nearly $400 billion last year, comprise 80 per cent of our trade with the entire world. It's one thing for oil and gas to move to the States at these prices. It's quite another for autos and parts, telecom and pharmaceuticals. In recent years, more cars have been made in Ontario than in Michigan, but the competitive advantage of the Canadian industry has long been a cheaper dollar. Those margins have disappeared. Since the dollar started its rise from 62 cents five years ago, Ontario and Quebec have lost nearly 200,000 jobs in manufacturing, though service industries have taken up much of the slack.

The Alberta economy, strong as it is, can't carry the entire country on its back. If the price of oil and the dollar don't begin to give, and fairly soon, the third number, unemployment, could start to move in the other direction.

In other words, what we're seeing now isn't sustainable.

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