A top CIBC economist says investors should be skeptical of the notion that the rising loonie will not adversely affect the manufacturing sector going forward, as it is too early to evaluate the impact parity will have.
In a new report, Avery Shenfeld, senior economist at CIBC World Markets, says many optimistic forecasts have relied on the fact that a pair of key numbers -- the level of Canadian factory shipments and the GDP -- are improving.
But he says those improvements have been measured in comparison to some of the very low numbers that have been posted during the recession.
"Those impressed by the recovery to date need a reality check," Shenfeld writes in a brief weekly report released by the bank on Monday.
Shenfeld says the manufacturing GDP and shipments are one-fifth below their pre-recession peak levels, putting the economy at the same place it was in the late 1990s.
"The effect of the strong Canadian dollar will show up in the extent to which the factory sector can make up that vast remaining ground," Shenfeld writes.
Furthermore, Shenfeld says it could take two years for the full impact of the rising dollar to be realized.
Canadian manufacturers may shield themselves from short-term currency risks, but they will eventually have to face the music of "translating foreign sales into fewer Canadian dollars," says Shenfeld.
And they are already falling behind their U.S. counterparts as the dollar stays high.
"All told, there appears to be a two-year lag between the Canadian exchange rate and its impact on this country's share of North American manufacturing activity," Shenfeld writes.
"That does give time for other sectors, particularly natural resource extraction, to make up for some of the downward pressure on manufacturing, and for offsetting productivity and cost adjustments. But let's not be blinded by near-term monthly gains in output into thinking that currency gains are no longer an albatross around the neck of Canada's factory sector."
Ottawa is also keeping a close eye on the flight of the loonie, which came within a penny of parity with the U.S. dollar on St. Patrick's Day.
As of early trading on Monday morning, however, it stood at just over 98.05 cents US.
Last week, Industry Minister Tony Clement acknowledged that having the dollar flirt with parity has historically "been an issue for Canada."
But he said Canadian manufacturers were accepting the reality of a higher dollar and increasing their productivity to compensate.
With files from The Canadian Press
