Thank you for inviting me to speak today.
Let me say that the impact on the Canadian economy from the appreciation of the Canadian dollar is going to be far worse this time than earlier appreciations, for five reasons.
First of all, in previous periods the U.S. economy was quite strong, which tended to suck a lot of imports into the U.S. economy and help offset the negative impact on Canadian exporters from the rise in the Canadian dollar. That effect is no longer there.This time the U.S. economy is quite weak, if not in recession, so we're going to have the full impact of the rise of the Canadian dollar impact Canadian exports, which will certainly make the situation directly worse.
Also of course, you have the impact on Canadian import-competing firms. They will also suffer more than before, in part because the Canadian dollar has risen versus other currencies this time. Unlike previous episodes where the Canadian dollar ran up and other currencies also appreciated, it was really a decline in the U.S. dollar. This time the Canadian dollar rose versus those other major currencies. So Canada has become less competitive not only vis-à-vis U.S. producers but vis-à-vis third-country producers in the U.S. market, and also in the those third countries as well as in Canada. So Canadian companies are getting a double whammy in terms of the appreciation of the Canadian dollar because of that.
Also, the Canadian dollar has risen astronomically relative to Canada's productivity level versus U.S. business productivity level. When the Canadian dollar rises significantly above that level of relative productivity, you have an impact on Canadian businesses. The further we go above this underlying value of the Canadian dollar, the greater the impact; that is, there are non-linearities in the degree of impact. Ultimately companies will give up on the U.S. marketplace or other marketplaces, and you'll have a disproportionately large negative impact.
Finally, the volatility in the exchange rate makes it impossible for business people to know what the future holds. The exchange rate volatility has gone off the charts, and research shows that businesses reduce investment when they don't have a clear sense of what the future holds. Increased volatility in the exchange rate reduces business investment, which is one of the lifebloods of productivity for the Canadian economy. The implication of that is that firms need help to offset some of these negative impacts. Possible options would be to continue with the accelerated CCA write-offs or advance in the corporate tax cuts.
In research, looking at the flexibility of the product and labour markets and the impact on the Canadian economy from an external shock such as the Canadian dollar appreciation, we found that the more flexible the economy, the greater it is able to withstand these shocks and come back to an equilibrium position. Enhancing product and labour market flexibility is another important step that policy-makers can take to try to mitigate the impact of these shocks.
They will continue in the future. Today it's the Canadian dollar, but in another few years there could be another type of shock. You have to try to encourage the flexibility of product and labour markets. Certainly reducing the interprovincial trade and labour barriers is one step in that policy area. You want to ease labour flows; they are barriers to labour building within the country.
We have skill shortages in a number of occupations, and there tends to be a reluctance on the part of some employers to hire people even though they have the basic required education qualifications. In research we did last year, there is a reluctance on the part of employers to do what they call the double transition of both the occupation as well as the industry, even though there were highly qualified individuals. Some of the solution has to be a better way for people to participate in the labour market to demonstrate their competencies. So prior learning assessment mechanisms, such as what they have in Australia and New Zealand, will be useful, as will be those countries' current competency assessments. And further work to improve foreign credentials recognition would also be helpful.
Thank you.