In terms of the Canadian dollar and its impact on the Canadian economy, it's important to keep the rise in context. As has been mentioned, commodity prices have been going up and the U.S. dollar has been going down, both of which have forced the Canadian dollar up.
There is reason to believe that the context today is worse for the Canadian economy than it was the last time we had a rapid rise in the Canadian dollar. In part that's because with the rise in commodity prices from an already high level, you have overheated economies in the resource-based sectors of the country, so it's less likely that further growth will come from that. Also, as the Canadian dollar goes higher, the pressure on the manufacturing base will intensify.
While the U.S. dollar has gone down, it has not gone down equally for all currencies. The Canadian dollar is one of those that has risen the most against the U.S. dollar, therefore our relative competitiveness in other markets has deteriorated versus third countries such as Japan. Therefore there is likely to be more of an impact on Canadian exports during this cycle than the last time.
The U.S. economy is also far weaker during this cycle than it was back in 2002-04, when the Canadian dollar ramped up quite considerably. It's well known that the U.S. economy is experiencing a number of problems this time. Last time it was quite robust, and the growth of the U.S. economy sucked in a lot of imports from Canada and helped to offset the negative impact upon Canadian exporters from the rise in the Canadian dollar.
This time we don't have that. We already have an overheated economy in Alberta and in the resource-based sectors of a number of provinces. So you have less of an offset this time than during the previous period.
There is some positive news in terms of some of the changes that have occurred recently. Certainly the mini budget that came out recently will provide some fiscal stimulus, although it will not be sufficient to offset the negative impact from the rise in the Canadian dollar, even after you factor in the rise in the price of oil as well.
One big negative is the volatility of the Canadian dollar. If you're a business person, you have no clue how to factor in exchange rates and resource prices, because they're fluctuating wildly. Volatility has a negative impact upon business investment, and some economic research has illustrated that. Therefore, Canadian companies have this extra pressure on them caused by uncertainty due to the volatility.
There are several key factors that will influence how large an economic impact the rise in the Canadian dollar will have upon the economy. One is monetary policy. If there's no accommodation, you have a larger negative economic hit. If the Bank of Canada eases interest rates, obviously that will have an offsetting influence by stimulating the domestic economy as net exports contract.
The other key thing is the flexibility of the wage-price system. The more inflexible the wage-price system is, the larger the shock and the longer it will take to work its way through the economy.
One policy response is some help for businesses to invest. Certainly the cut in corporate income tax rates is one benefit, although that tax cut is more tail-end-loaded, with most of the fiscal stimulus and tax cuts occurring later on.
One can argue for an investment tax credit or an extension of the CCA holiday to help businesses invest and take advantage of the high value of the Canadian dollar in terms of capital imports.
You should also consider policies that will improve the flexibility of the economy. It's unlikely that they will have a major impact during this cycle, but with the unemployment rate at a 33-year low, certainly anything to lower the full unemployment rate, or NARU, will help today and down the road.
So improving the flexibility of the wage-price system will be helpful. One can do that through geographic mobility--encouraging people to shift from one area to another where the jobs are--as well as inter-occupational mobility. In some surveys we've done, a certain degree of reluctance was illustrated by employers to double-transition between industries and occupations. Given the current pressures on the labour supply, anything that will help companies recognize the qualifications and skills that people have and make those sorts of transitions will be helpful.
In Australia and New Zealand, for example, they have a much more well-developed system of recognizing current competencies and prior learning. Moves toward that type of approach, as well as foreign credential recognition, would be helpful for the Canadian economy in the short, medium, and long terms.
Thank you.