The fate of the Canadian dollar dominates any discussion of that country's economic outlook.
After a few years of steadily gaining on the U.S. greenback, Canada's dollar outgrew its U.S. counterpart in 2007, ending the year at slightly above par. By contrast, Canada's dollar was worth about 90 U.S. cents when 2007 began.
The Canadian dollar's rise has hurt the competitiveness of the country's manufacturing sector, including plastics processing. The strong dollar means processors ``have exhausted the ability to eat more [profit] margin,'' said Serge Lavoie, president of the Canadian Plastics Industry Association in Mississauga, Canada.
Processors sacrificed profit margins to compete when the dollar was worth 90 U.S. cents or less, but when the dollar traded at par and above, they actually lost sales, he said in a telephone interview.
Canada's currency had risen steadily since early 2002, when it was valued at US$0.62. But appreciation of Canada's dollar quickened in 2007.
The dollar's gyrations were behind a lot of volatility in plastics shipments in 2007, Lavoie said in a telephone interview. At the 10-month mark, the value of domestic plastic product shipments was down 4.2 percent and exports were off by 5.7 percent, according to Lavioe.
However, imports of plastic products, attracted by the strong dollar, were up 2.5 percent. U.S. companies are becoming more active in the Canadian market because of the currency differential, Lavoie stated.
Mold shipments reflected the currency trends, as well as cutbacks in the automotive markets. Mold exports were down 16.9 percent at 10 months, as Canadian mold makers lost ground to offshore competitors.
The outlook for 2008 is closely tied to Canada's currency performance. If Canada's dollar does not weaken, plastics firms ``are in for more pain,'' Lavoie said.
Processors will hope for a more stable Canadian dollar following the past year's volatility. In 2007, the dollar swung between US$0.90 and US$1.10 in early November. A more stable currency is expected by many economists, who variously are calling for the dollar to settle down at about US$0.95 to US$1.05 in 2008.
Giving strength to the Canadian dollar will be an anticipated slowdown in the U.S. economy, as well as momentum in Canada's oil and gas sector, according to a research report by Scotiabank Group.
One sector reacted to currency gains by knocking on government doors. The auto parts industry called for massive government loans to help firms adjust to the currency changes and other factors hurting parts makers, according to published reports. The Automotive Parts Manufacturers' Association of Toronto is asking for a total of C$400 million (US$404 million) to replace bank financing among members, to set up an industry investment fund and to address the dollar's high value.
Publicly, the proposal was coolly received by the federal and Ontario governments. Underlining problems faced by the auto sector was a forecast by the Conference Board of Canada that auto parts firms will see their profit plunge 40 percent in 2008. Canada is the second-largest import source of auto parts to the United States, behind Mexico.
Lavoie said CPIA is not seeking any such government relief, but it promotes taxation reform to help cash flow. One recent move in the industry's favor was removal of Ontario's capital tax for manufacturing and resource companies. At the federal level, accelerated capital cost allowance has been introduced.
Possibly as worrisome to the manufacturing sector as the currency imbalance is whether the U.S. economy could be headed for a recession, according to Jayson Myers, chief economist for Canadian Manufacturers & Exporters, an Ottawa-based trade association. When there is too much production capacity in North America, Canadian plants, being smaller, typically face closure sooner than their U.S counterparts.
Overall, Canada's economy is forecast to grow 2.3 percent this year from 2007's 2.6 percent, according to Toronto Dominion Bank economists. The dollar's high value and a slowdown in the U.S. economy, both of which hurt exports, were cited for the year-over-year decline. On a regional basis, the western provinces and Newfoundland will lead growth, predicts the Conference Board of Canada.
New home construction should dip this year, according to Canada Mortgage and Housing Corp. in Ottawa. It sees 214,000 new housing starts in 2008, down 5.9 percent from starts in 2007. Among other economic indicators, new vehicle sales slipped in the second half of 2007 and the annualized inflation rate hit 2.5 percent in November.