Canada’s battered manufacturers are threatened more by failing to rebuild production capacity than swings in the currency as global demand recovers, according to Toronto-Dominion Bank’s new chief economist Beata Caranci.
Makers of automobiles and wood shingles are getting a boost this year from a weaker currency and stronger growth in the U.S., which buys three-quarters of Canada’s exports. Recent reports also show companies are resisting expansion after what Bank of Canada Governor Stephen Poloz has called “serial disappointment” from the global recovery.
The strengthening of Canada’s currency to parity with the U.S. dollar in 2007 and again this decade was fatal to hundreds of factories, which also faced tougher competition in Mexico and China. Still, more companies have found ways to adjust to currency swings, meaning it may be time to focus on expansion again, Caranci said.
“Ultimately if you don’t have the capacity to meet demand you become your own problem,” she said. “That may present a greater limitation to competitiveness than the dollar itself.”
“A lot of companies have a fairly sophisticated view now understanding the volatility related to the currency, and putting hedging strategies and other things in place,” Caranci said. Canada’s dollar has weakened to about 84 U.S. cents, from parity in early 2013.
So far companies are working their existing locations harder, with Statistics Canada’s index of industrial capacity utilization rising to 83.6 percent in the fourth quarter from a low of 71.6 percent in the second quarter of 2009. That’s the highest since the start of 2006.
Caranci replaces Craig Alexander, who said on May 11 he was leaving the top economics job at Canada’s second biggest lender at the end of June for a post at the C.D. Howe Institute. Caranci, formerly deputy chief economist, was head of TD’s U.S. and international economics unit.
There may still be volatility in store for business managers and investors as central banks tighten policy, Caranci said. Some investors have become accustomed to low-for-long interest rates at a time when there is scope for different types of policy moves in the U.S., Europe and Japan.
“This is where our interest is in terms of keeping our eye on exactly how central banks exit from this very strong easing policy that has been in place for years,” she said. In the U.S. “they will continue to telegraph their decisions just to get a read on markets,” and may tighten around the end of this year as markets expect, she said.
The Fed has said it will lift its key federal funds rate -- which has been near zero since December 2008 -- when it sees further labor-market improvement and is “reasonably confident” inflation will return to its 2 percent goal over time. Most economists in a Bloomberg survey late last month predicted the central bank will start tightening in September.
“You could have a nice articulated plan but the reality is we are in uncharted territory,” she said. “I don’t expect a perfectly smooth adjustment, I think we should brace ourselves for some volatility.” Policy makers must also consider consumers “who have never known” high or even average mortgage rates and who will be sensitive to increases, she said.
Caranci, 44, started her career at TD after earning degrees from her hometown University of Toronto and Wilfrid Laurier University in Waterloo, Ontario. She returned to Toronto-Dominion after a stint as an economist working on a trading floor at Royal Bank of Canada.
Stepping into the job as the only female chief economist at one of Canada’s five biggest banks, Caranci said she will continue her past work on the participation of women in the economy when she has time. Caranci noted she isn’t the first female chief economist at TD, following Ruth Getter who was hired to that job in 1994.
“It’s an interest and a passion of mine to always do a health check-in to see what the progress of women” is, she said.