Carney: Oil is 'unambiguously good' for Canada -

Carney: Oil is ‘unambiguously good’ for Canada


CALGARY – Canada’s reliance on oil is “unambiguously good” for the country as a whole — not just the West — Bank of Canada governor Mark Carney said Thursday in a speech that called for more pipelines and dismissed fears about so-called Dutch disease.

Rather than blame high-priced oil and other commodity exports for the decline in manufacturing, central Canada should get in more on the bounty by building pipelines and refineries to where the markets are in Ontario and Quebec.

“Higher commodity prices are unambiguously good for Canada,” he told a conference of business leaders and international policy-makers in Calgary.

“The strength of Canada’s resource sector is a reflection of success, not a harbinger of failure.”

Canadians should find new ways to take advantage, said Carney. He points out that eastern Canadian consumers are importing oil at prices that average $35 a barrel more than what western heavy oil producers receive.

“New energy infrastructure — pipelines and refineries — could bring more of the benefits of the commodity boom to more of the country,” he said.

The central bank governor has spoken out before against critics of Canada’s dependence on natural resources, particularly as rising demand from emerging markets in Asia have caused prices to rise, and the Canadian dollar to climb to and past parity with the U.S. The flip-side has been that manufacturers have found it difficult to cope in foreign markets, a phenomenon dubbed as Dutch disease.

NDP Leader Thomas Mulcair this year blamed the dynamic for the decline in central Canada’s manufacturing sector, since their exports have become uncompetitive in global markets.

But Carney said the analysis is simplistic and only partly explains the decline of Canada’s factory sector.

He acknowledges that high commodity prices have lit a fire under the loonie, contributing about half its appreciation over the past 10 years. Meanwhile, manufacturing as a share of the economy has fallen from 18 per cent to 11 per cent today.

However, he points out that Canada’s experience is shared by many advanced countries, including those without resource riches, and that exchange rates only partly explain what is occurring. And there has been an offset, he added.

“It is important to recognize that, for almost all the provinces, trade inside Canada has grown fast enough to offset a significant portion of the declines in international trade,” he said.

“Central Canada suffered a real decline in international exports of $18 billion between 2002 and 2008, which was almost entirely offset by increases in interprovincial exports of $16 billion.”

Some of the increase reflects sales of central Canadian machinery makers, primary metal producers and chemical companies to feed Western Canada’s resources boom.

More importantly, he says exports of oil and other commodities have brought greater wealth into the country, including generally higher incomes and greater economic activity.

Carney also dismissed calls for him to intervene in the currency market to devalue the Canadian dollar, which now trades above parity with the U.S.

In the short-term, that could indeed help exporters of manufactured goods compete, he said, but ultimately the effort would be futile since over time wages and inflation would need to rise, putting manufacturers back into the same uncompetitive territory.

“The cost of this misadventure is lower output of about one per cent and higher volatility in inflation, output and employment than when the exchange rate is allowed to do its work,” he said.

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Carney: Oil is ‘unambiguously good’ for Canada

  1. I wonder how long it will take for Mulcair to waffle on his ridiculous position now that it has been so thoroughly debunked by economic superstar Mark Carney.

    • Actually, Carney is the one waffling on the issue. A year ago he was saying the overvalued dollar was bad for the economy:

      G&M: Strong loonie casts shadow over recovery: Mark Carney

      I tend to believe the first Mark Carney. The reality is the dollar is overvalued by 25% according to the OECD based on PPP. This is the equivalent of having a 25% tariff on exports. Clearly, that is bad economic policy.

      Wages are inflated by 25%, which is obviously bad for business especially in the age of globalization. Wages will have to be busted by 20% just to bring our competitive position back to square one.

      With a dollar at parity, Canada is in a position to the US like Greece and Spain are to Germany: competitiveness is expected to be evened out through deflation. But this ends up killing jobs and GDP growth which only damages the economy and causes debt to soar.

      Carney was chiding Canadian corporations for hoarding cash last week. Why are Canadian companies not investing their big tax cuts in Canada and raising productivity like they’re supposed to ? Because the overvalued dollar is pricing their goods and services out of the world market.

      Canadians are more than hewers of wood and drawers of bitumen. We need a solid economic engine founded on value-added exports that can weather the resource booms and busts.

    • BTW, the Liberals should be the biggest proponents of the Dutch Disease theory. When they were in power they created a decade-long manufacturing boom with economic policy that erred on the side of strong GDP growth over a low dollar. (The opposite of Harper’s present position.)

      When the dollar was properly valued in 2005, they left behind a $20B trade surplus. The soaring loonie has turned this into record $50B trade deficits (-3% GDP, 3 years in a row.)

      They also created 500,000 good-paying export-related jobs that have disappeared under Harper.

      The Dutch Disease is very bad for the economy. We are now supporting high levels of imports on record levels of personal debt. That will equalize out when Canadians start paying down debt which will cause the economy to slow.

      Just compare GDP growth to when the Liberals were in power to what it is now. From 1997 to 1999 the dollar fell from 75 cents to 65 cents (14% drop) but inflation also fell from 2.1% to 1%. GDP growth during this time was: 4.2%,
      4.1%, 5.5%. GDP growth in 2011 was 2.4% and is forecast lower over the next 3 years.

      Hopefully the Liberals will champion their old pro-growth economic policies and not side with Harper who is destroying the economy.

      • Our dollar was not “properly” valued, it was grossly undervalued, due to an enormous and unprecedented tech boom and consumer boom in the US that caused massive capital flows into the US, driving their currency higher versus our own. Our industry became very dependent on that huge currency differential, and many companies could not survive when the differential disappeared. Tbe USD has collapsed in value because their economy collapsed. Our dollar held up because our economy held up, mostly due to our resource industries.

        According to the Dutch Disease advocates, we need to weaken this last bastion of strength in our economy so that the other sectors will seem stronger by comparison. It is an odd, almost masochistic argument to make. Does anyone really believe we can just devalue our dollar and bring the good ol’ late 1990s back? Our dollar will fall vs. the USD only when A) Our economy tanks as badly as theirs, or B) Their economy recovers. Unfortunately, A seems more likely than B. And when that happens, we’ll miss the good ol’ days all over again, and yearn for the time when we had nothing more to worry about than imaginary ailments like Dutch disease.

        Think this through carefully: wbat would we need to do to bring our dollar down? Can’t lower interest rates, they are at record lows. So monetary solutions are out. What would it require to make our currency lower vs. the currency of a country on the economic skids? We’d have to join them on the skids by extinguishing our remaining economic growth. Now, how does Mulcair or anyone else feel this is a desirable solution?

        • The Canadian dollar dropped from around 85 cents during the Mulroney years to 75 cents soon after probably because of the high deficit. (Mulroney used to prop up the dollar by buying Canadian dollars.)

          The drop from 75 cents to 65 cents (1997-1999) occurred because starting in mid-1996 Canada set interest rates lower than the Fed’s rate (pro-growth monetary policy.) Canada’s interest rates remained below the Fed’s until 2002.

          From 2003 to 2008 the dollar rose from about 64 cents to parity.

          It’s a mistake to think the USD has collapsed. It’s considered a safe haven. Demand for 10-year T-bills is way up and interest is at historic lows. Investors are hoarding US dollars.

          The overvalued dollar is by no means a strength to the economy or of any benefits to Canadians (aside from cross-border shoppers.) If one checks out the inflation rate over the past 15 years, there was no effect on prices as the dollar fell and rose. Our inflation rate was pretty much the same as the US inflation rate.

          From 1999 to 1997, the dollar fell 14%. But did prices rise 14% as a result? No. The inflation rate actually fell from 2.1% to 1% and GDP growth was relatively phenomenal: 4.2%, 4.1%, 5.5%.

          From 2003 to 2008 the dollar rose 70% in value. But did prices drop 70%? No. Again, inflation was pretty much the same as the US.

          It’s a fallacy to suggest an undervalued dollar kills GDP growth, jobs and raises deficits. The opposite is true. When the dollar was undervalued we had double the GDP growth we have now, 500,000 good-paying export-related jobs and turned a $43B deficit to a $14B surplus. Now we have higher unemployment, anemic GDP growth and big deficits across the country.

          • (Mulroney used to prop up the dollar by buying Canadian dollars.)

            Oh brother. Is that another version of the old “Mulroney conspired to keep our dollar high as a secret promise to the Americans in exchange for signing the FTA” nonsense? It sure sounds like it.

            Worse still, are you suggesting that Mulroney used deficit spending to purchase C$???? Ron, you’re in way over your head here. Even if there was a conspiracy, such actions would not work. If a government borrowed money to buy C$, they’d have to print more C$ to do it. The printing of one more C$ would instantly neutralize the effects of purchasing one more C$. Take a good look at the budgetary breakdowns for 1990, 1991 and 1992. NONE of the federal budget was spent “buying Canadian dollars”. To suggest the government of the day was using loonies to buy loonies is just…. loony.

            The central bank could use foreign currency reserves to purchase C$, but such actions are extremely limited and temporary, since the BoC can’t print foreign currencies. It can only print its own. Foreign currency reserves would run out long before a significant appreciation takes hold.

            Not to be insulting or anything, but you really need to bone up on the basics of monetary theory. Our dollar was “high” during the early 90s because of John Crowe’s battle against inflation, which kept interest rates up to 5 points higher in Canada than in the US. This drew in enormous capital inflows into Canadian bonds, even during a recession, and resulted in a massive appreciation of the C$. It was no secret and no conspiracy. The BoC was very open about its single minded pursuit of inflation targets. And everyone knows the effects of a large interest rate spread.

          • I don’t know what conspiracy theory you are talking about; I’m talking about facts. When Mulroney was in power the Bank of Canada would intervene in the foreign exchange market to keep dollar at a certain level. I remember watching it in the news. The BoC actually made a profit by buying Canadian dollars low and selling them back when they were higher valued. I imagine they had a reserve of US dollars to make the purchases.

            This is from the BoC website:

            “Currency markets can be volatile, and the Bank of Canada may intervene in the foreign exchange markets on behalf of the federal government to counter disruptive short-term movements in the Canadian dollar. Any intervention is governed by an intervention policy, which is established by the government in close consultation with the Bank of Canada.

            “Prior to September 1998, Canada’s policy was to intervene systematically in the foreign exchange market to resist, in an automatic fashion, significantupward or downward pressure on the Canadian dollar.”

            Not to be insulting or anything, but you really need to bone up on the basics of monetary theory…


          • …the Bank of Canada may intervene in the foreign exchange markets on behalf of the federal government to counter disruptive short-term movements…

            Read the above phrase – “short term”. They intervene regularly to smooth out short term fluctuations. If they buy C$, they must sell foreign currency reserves. If they buy foreign currency, they must use C$ to purchase them. The only real way to produce a long term appreciation or depreciation in the currency value is through interest rates. Interest rates are at record lows. Therefore, the dollar is as low as they can make it right now, without pushing interest rates to zero and below, which would be reckless and inflationary. Are you suggesting they intevene with drastic measures such as negative interest rates? Despite the disastrous consequences that can have? Or do you know of some other means of pushing the dollar down without lowering interest rates?

  2. Let me get this straight:

    * 500,000 good-paying export-related jobs killed: unambiguously good
    * a $20B trade surplus turned to a $50B trade deficit: unambiguously good
    * wage costs inflated by 25% killing the competitive position of Canadian businesses: unambiguously good
    * letting our value-added sector wither and die, falling behind the rest of the developed world: unambiguously good
    * going all-in on dirty-energy when the price of oil must remain above $80/barrel to keep oil-sands oil profitable: unambiguously fantastic!

    • And you are certain that the oil industry killed all 500,000 of those manufacturing jobs? And you are certain we have fallen behind the rezt of the world?

      • It wasn’t the oil industry. It was the dollar becoming overvalued by 25% over the past 6 years. This is the result of a market distortion caused by demand for Canadian dollars related to oil-sands exports and development.

        It’s nonsense to claim the oil sands have to be shut down to fix the problem (as Carney is claiming.) There are many tools available to take the pressure off of the dollar.

        The reality is that Harper and Carney don’t want a properly-valued dollar (which is 81 cents US according to the OECD based on PPP.) They prefer a US dollar as Canada’s currency which raises investors’ real value of wealth.

        This does nothing for workers who are net borrowers. Wages will have to be busted by about 20% in order for Canadian businesses to regain their competitive position. That will leave workers with a much greater debt burden (which won’t be reduced by 20%.)

        Canada is falling behind the rest of the developed world. Value-added exports are declining and so is productivity. An innovation-based economy creates much more wealth than a resource-based economy. So as Harper drags Canada down the value-added chain, he is also dragging down living standards.

        • How are we supposed to get back to a 75 cent loonie when the USD has collapsed? Interest rates are already at record lows, so there’s nothing the BoC can do to lower the dollar. The USD and Euro have fallen vs. the loonie because their economies are worse off than ours is. I’d rather not follow the US and Europe off the cliff. I suspect we will anyway, but I’m in no hurry.

          • The USD didn’t collapse. It’s considered a safe haven. The greatest influence on the overvalued dollar is oil-related. But we don’t have to shut down the oil sands to correct it. Switzerland has recently devalued its franc arguing a “massive overvaluation” was hurting its economy.

            In Canada, Harper and Carney actually want to hurt the economy to drive down wages and create better money-making opportunities for investors. They want to adopt the US dollar as our currency and lower Canadian wages and benefits (public and private) down to US levels.

            Canadians are certainly going to find out the hard way how damaging an overvalued currency is. Hopefully sooner than later, or we’re in for really big trouble.

          • The USD has certainly collapsed compared to where it was a few years ago. The capital inflows into the US are not anywhere close to what they were during the boom, safe haven or not. The capital inflows coming in now seeking safety are almost entirely going into treasuries. There’s no huge flow of investment capital. The USD is a reflection of their economy.

            And Carney & Harper certainly do not want to “drive down wages”, as that leads to less tax revenue, and in the long run, fewer votes. Investment income from dividends and capital gains is taxed at a much lower rate than wages and salaries. To say that a government would intentionally push for income to be transferred from wages to investment is absurd. You’re buying into a conspiracy theory that simply doesn’t exist.

          • If one checks the US dollar against the Euro and currencies of Norway, Sweden, Denmark, Singapore what you find is that the dollar strengthened against these currencies from about 1995 peaking in 2001-20002; then the currency weakened against them from 2003 to 2008. The US dollar is back around the same level it was in 1995 with these currencies. So I don’t think that would qualify as a “collapse.”

            It’s no conspiracy that wages have to be driven down with a dollar at parity. It’s simple math. Take for example a car plant operating in Canada. It now costs 60% more to employ a worker than it did in 2003. According to the OECD figure, the dollar is overvalued by 25%. That means wages have to be driven down by 20% just to get back to the same competitive position we had in 2005. That’s why there have been 500,000 export-related job losses.

            Aside from wage costs being more pricey there is also a downward pressure on wages from globalization.

            Harper has already started a number of wage-busting initiatives: forcing people on EI to accept lower-paying jobs; allowing corporations to hire temporary immigrant workers at a 15% discount; legislating that Canada Post workers receive an offer less than what Canada Post was giving.

            Harper’s many free-trade deals with developing countries will also put a downward pressure on wages. (I believe “right-to-work” union-busting legislation is a provincial jurisdiction and out of Harper’s hands; but Harper has gutting the Investment Canada Act allowing foreign takeovers of Canadian companies that move production to the US: like Caterpillar and US Steel.)