The Loonie’s Stagnant Purchasing Power

March 8, 2012

1-minute read

The following note also appears on Business Insider:

When Ontario’s Premier recently complained that Canada’s petro-dollar undermines manufacturing exports, many economists tripped over each other to counter that a strong loonie benefits all Canadians through cheaper imports.

In theory, that makes sense. Incomes denominated in Canadian dollars should be worth more if each Canadian dollar buys more.

But it’s not a theoretical question. The Organisation for Economic Co-operation and Development (OECD) measures the purchasing power of currencies in member countries.

The Exchange Rate vs. Purchasing Power Parity (annual averages in U.S. cents)

 Year  E-Rate  PPP
 2002   63.7  81.3
 2003   71.4  81.5
 2004   76.8  81.2
 2005   82.5  82.4
 2006   88.2  82.8
 2007   93.0  82.6
 2008   93.8  81.0
 2009   87.6  83.5
 2010   97.1  82.0
 2011 101.1  81.3
 

The loonie has taken flight in financial markets, soaring from an annual average of 63.7 American cents in 2002 to 101.1 American cents in 2011.

Yet the OECD calculates that, in 2011, a Canadian dollar bought only as much in Canada as 81.3 American cents bought in the U.S. Strikingly, that ratio was exactly the same back in 2002. In other words, the loonie’s ascent has delivered no apparent improvement in purchasing power.

When the Canadian dollar reached parity with the U.S. dollar in 2007, many commentators cautioned that it could take time for the savings to be passed through to Canadian consumers. However, the loonie has now been near parity for four of the past five years.

Having Canada’s exports priced at this less competitive exchange rate has pushed many exporters out of business or out of the country. Canadians have lost more than half a million manufacturing jobs since 2002, but are still waiting for the promised benefits of a high-flying loonie.

Erin Weir is an economist with the United Steelworkers union and a CCPA research associate.

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