High Dollar Lifts Service Sector But Other Industries Feel the Pain from Loonie's Strong Gains Against Greenback

(Globe and Mail) The high dollar is creating potential economic winners as well as losers, and most of the leaders of the victory parade are in the service sector, a Toronto-Dominion Bank study suggests. However, even the winners, who stand to gain in terms of cost savings and "outright benefits," will ultimately feel "a second-round pinch from the dampening economy-wide effects of a higher dollar," the study warns. The study was prepared by TD senior economist Derek Burleton and economist Carl Gomez. It is included in a forecast in which the two economists say they expect the strong dollar to slow the growth of overall output, profits and employment this year and next. However, they also say they do not expect a repeat of the recession of the early 1990s, which followed the loonie's last sharp, sustained runup. Not surprisingly, the study found that the biggest losers from the approximately 30-per-cent rise the loonie has enjoyed against the U.S. dollar in the past two years are manufacturers of machinery and other goods and equipment that are heavily dependent on exports and also vulnerable to competition from imports. The high dollar makes their products more expensive in the United States, while making competing imports cheaper. By contrast, among the key characteristics of companies or institutions the high dollar is helping, at least for now, are that they do little in the way of exporting and face little competition from imports. They do, however import computers and other productivity-enhancing equipment and material, particularly from the United States, as well as other production "inputs," the forecast says. The biggest beneficiaries, it adds, are those industries where the total investment in productivity-enhancing areas "is large in relation to overall output."

Industry Sector Export Orientation Importance of Imported Inputs Net Winner or Loser Machinery Manufacturing. 66% 23% Loser Metal products Manufacturing 39% 14% Loser Forest products Manufacturing 60% 6% Loser Computer & Electronics Mfg. 64% 41% Loser Paper Manufacturing 54% 9% Loser Oil and Gas 33% 3% Loser Agriculture 22% 10% Winner Retail trade 11% 3% Winner Utilities 5% 6% Winner Construction 0% 13% Winner

The nine winners it identifies are led by what it calls educational services -- universities and community and technical colleges -- the construction industry, transportation services and financial services. Asked how the education sector came to top the class, Mr. Gomez said: "Their actual spending on computers, technology and, say, lab equipment may not be as high as other industries, but it is high compared to their actual measurable output, which is mainly wages and salaries of instructors and teachers." On the forecast front, meanwhile, the TD economists said that following a net gain of about 5,000 manufacturing jobs last year, they are expecting a net loss of about 50,000 positions in 2005 and 2006, with the bulk of the cuts coming this year. The rest of the economy, they figure, will produce about 200,000 new jobs, for a net increase of 150,000, the slowest two-year pace in a decade. "I mean 150,000 isn't a dismal year, but it's well off the 300,000 pace that we've become used to seeing," Mr. Burleton said in an interview. Meanwhile, the TD economists say in their forecast that unless the dollar soars above its current range, they see little chance of it precipitating a repeat of the 1990-91 recession. That is because "the general economic backdrop is both fundamentally healthier and more supportive today than in the late 1980s," the forecast says. Among the differences, it says, are that the global economy is stronger than it was, real interest rates are much lower, consumer and corporate balance sheets are much stronger, and the federal and provincial governments have more room to manoeuvre, because most can boast budgetary surpluses, rather than the ballooning deficits of the late 1980s.

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