Canada is already in a recession, says Bank of America, and the loonie is set to get hammered

Bank of America Merrill Lynch has become the first bank to call for a Canadian recession this year.

Economist Emanuella Enenajor and her team now say that Canada’s economy will shrink by 0.6 per cent in the second quarter, following a 0.6 per cent contraction in the first. The definition of a recession is two consecutive quarters of contraction.

A recession sets up the Bank of Canada for another rate cut this year, said Enenajor, and she expects that the downturn will hammer the Canadian dollar — knocking it down to just under 77 cents U.S. by early 2016, the lowest level in more than a decade.

Stephen Poloz's Secret Plan: Sink The Loonie?

Stephen Poloz may be trying to sink the loonie.

But it’s not some underhanded plan to damage Canada’s currency that the Bank of Canada governor may have in mind: Rather, it may be a “stealth” plan to stimulate the economy without lowering interest rates further, CIBC says in a note.

Economists generally agree that the Canadian dollar has been too strong in recent years, well above a fair exchange rate against the U.S. when you look at prices on both sides of the border. That has made Canadian exports less competitive, explaining why, for instance, the country's auto industry is struggling even as the global auto industry booms.

High loonie causing harm says Mulcair

NDP leader Thomas Mulcair said Saturday that parts of the country are paying a price for the prosperity enjoyed by natural-resource sectors such as the oil-sands in Alberta, because of the way they raise the value of the Canadian dollar.

"It's by definition the 'Dutch disease,'" Mulcair said Saturday on the CBC Radio show The House.

The "Dutch disease" is a reference to what happened to the Netherlands economy in the 1960s after vast deposits of natural gas were discovered in the nearby North Sea.

The resulting rise in its currency was thought to have caused the collapse of the Dutch manufacturing sector, and Mulcair said the same thing is happening in Canada.

"The Canadian dollar's being held artificially high, which is fine if you're going to Walt Disney World, [but] not so good if you want to sell your manufactured product because the American clients, most of the time, can no longer afford to buy it."

The Canadian dollar has traded higher or close to parity with the U.S. dollar for most of this year. Mulcair cited Ontario, Quebec and New Brunswick as some of the places affected by the high loonie.

But Alberta Environment Minister Diana McQueen, who was also on the show, said Mulcair was being divisive in his treatment of the oilsands.

She called it "old-style politics; trying to pit one part of the country against another."

Original Article
Source: the province
Author: Postmedia News

Canada Manufacturing: Loonie's Decade-Long Soar Means Factories Won't Be Coming Back, CIBC Says

The outlook is grim for Canadian manufacturing, as a strong loonie is expected to keep labour costs high, deepening the hollowing out of the industrial heartland and boosting regional income inequality in the years ahead.

In a briefing note to investors on Tuesday, CIBC World Markets predicted that a robust Canadian dollar would drive more factory jobs south of the border, as the U.S. and Mexico continue to be seen as more “cost-effective” places to manufacture everything from automobiles to rail cars.

“[B]eyond the one-time recovery from cyclically depressed demand, the factory sector’s growth prospects look to be seriously impaired by the structural hit from a strong Canadian dollar,” economists Avery Shenfeld and Warren Lovely maintained. “Notwithstanding recent gains in manufacturing, plants will continue to be lost to international competitors.”

In their analysis, the economists detail how the rebound in the loonie has transformed the economic landscape since it dipped to an all-time monthly low of 62 cents against the U.S. dollar a decade ago, before moving to parity and beyond in recent years.