Relying on weak currency limits investment, productivity

Service sectors hardest hit by poor exchange rates: study
||Last Updated: 10/31/2006

Many business leaders and financial experts worry the strong Canadian dollar will negatively affect exports and competitiveness. But a recent study shows that a weak currency can hurt a country's economy.

A currency depreciation reduces investment in physical capital — such as machinery and equipment — which can limit Canada's productivity and economic growth, according to a new report by the Conference Board of Canada in conjunction with the Social Sciences and Humanities Research Council (SSHRC).

"These findings should sound a warning bell for policy-makers concerned about Canadian competitiveness. Investment in physical capital is an important driver of productivity growth, and lagging labour productivity explains much of the Canada-U.S. income gap," said Constance Smith, co-author of the study and a professor at the University of Alberta. "Policies that weaken the exchange rate have important — perhaps unintended — consequences for industry investment, productivity and economic growth."