The Loonie Soars

Nice to see another topic making headlines rather than the same old evil which threatens to bring down the Canadian economy, mortgages.  The topic dejour today is the strength of the Canadian one dollar coin.  There’s a fair bit of hand wringing over the fact the Canadian dollar is today is worth $1.01 U.S.  Individuals who pull the leavers of power in this country often remind us that a strong Canadian dollar negatively impacts our economy.  Interesting position to take when one considers the reason why investors are flocking to the Canadian dollar.  Factors like, government debt which is manageable, stable employment numbers and a sound banking system.  Oh yeah, and free market economy.

There are those who are suggesting the Bank of Canada should intervene by easing monetary policy by lowering the overnight lending rate.  Those who work in the mortgage industry know that will not happen for a while.  There has to be clear evidence that housing market has cooled before the Bank of Canada would consider lowering the overnight rate.  Besides, it’s estimated that if the Bank of Canada was to lower the overnight lending rate to zero, the net effect would be the Canadian dollar would be worth 98 cents U.S.

Given that the Canadian dollar will remain strong for the foreseeable future the press and government should turn their attention to a far more pressing issue, like our productivity.  Canada spends approximately 1 per cent of GDP on research and development.  That is approximately half of what the U.S. spends. The gap in productivity between our two countries is widening, and if we were on par with U.S. productivity the strength of the Canadian dollar would not be as worrisome.

Innovation drives productivity. Every industry will have to make significant investments in research and development if we want to compete with the giants.  It’s not just about doing things faster and cheaper.  We will have to compete on value, service and produce products which are unique.  What drives productivity is a skilled workforce and this is an issue we all have to deal with.  We now have to compete in a global economy which is knowledge based.  Fundamental  structural change is required in Canada if we all want to maintain our standard of living in the future.  Government and industries both play a key role in this debate.  It’s time to actually have one.

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