BUSINESS COVER

That SINKING Feeling

JOHN GEDDES August 10 1998
BUSINESS COVER

That SINKING Feeling

JOHN GEDDES August 10 1998

That SINKING Feeling

BUSINESS COVER

JOHN GEDDES

Count New Yorkers among the unwitting victims of the Canadian dollar’s fall: the loonie’s dive has robbed them this summer of the wide-eyed smile of 11-year-old Alyson Yaraskovitch. Alyson’s parents, who both work for Atomic Energy of Canada Ltd., were hoping to drive the family from their home in Chalk River, Ont., to Manhattan, but they changed plans when the weakening dollar hiked the cost of travel south of the border. Instead, they settled for summer excursions to Toronto’s somewhat less bright lights and to Ottawa to take in attractions like the changing of the guard on Parliament Hill. Not quite as pulse-quickening as Times Square and Broadway, perhaps, but Alyson accepted the change in itinerary gracefully. “I would have liked New York,” she said with an air of resignation as the Yaraskovitches sat on the steps below the Peace Tower on a sunny morning, “but it was fun to get to go shopping in Toronto.”

Alyson is in good company when it comes to having to reconcile herself to vacationing closer to home.

No less an authority on the plight of the currency than Royal Bank of Canada chief economist John McCallum made a similar change in his own family’s summer plans. McCallum and his wife were under _

pressure from their three sons to

splurge on a trip to California from their home in Oakville, Ont. Faced with the added cost of converting diminished Canadian dollars into surging U.S. greenbacks, they settled for the classic Canadian summer experience of touring some of the famous mountain parks of Alberta and British Columbia. But while other Canadians forced to forgo U.S. holidays might gripe about the dollar’s weakness, McCallum can hardly complain—he has been among the most vocal defenders of the Bank of Canada’s inaction as the loonie dipped to record lows. “The bank’s only other option,” he told Maclean’s last week in a telephone interview from Emerald Lake in British Columbia’s Yoho National Park, “would be to jack up interest rates and let us take a hit in terms of jobs and the economy.”

While McCallum argues that the economy remains fundamentally healthy, he worries that the dollar’s tumble has left Canadians needlessly fearful that prosperity is somehow slipping away. Last week, an Angus Reid Group poll showed that in

Canadians feel trapped into staying home

July only 27 per cent of Canadians thought the economy was on the upswing, down from 44 per cent who were optimistic in May. Even before the dollar’s decline began to erode overall economic confidence, it had taken the bounce out of the stride of the usually footloose Canadian tourist. In the first five months of this year, as the loonie sank steadily in relation to the surging American dollar, Canadians took about 400,000 fewer trips to the United States than in the same period in 1997. Yet travel to other foreign destinations in those months was actually up by nearly 100,000 visits—a reminder that the Canadian dollar has generally fared much better against other countries’ currencies.

Still, it is the yawning exchange rate gap against the U.S. dollar that Canadians are watching—and with mounting anxiety. Currency traders reacting to the Asian economic crisis have been mowing down supposed psychological barriers: last week markets for the first time demanded $1.50 (Cdn.) to buy $1 (U.S.). Economists fiercely debate the implications. Generally, the news is good for exporters, bad for importers. But the most immediately apparent result for many Canadians is that travel to the United States is growing prohibitively expensive—forcing an unsettling break with tradition for those who perennially go south. Roger King, a 51-year-old partner in an office equipment business in Yarmouth, N.S., has taken a 10-day holiday in Maine with his wife every fall for a dozen years. This year, the trip has been cancelled—and King is not shrugging off the disappointment. “We work hard for our money, we are not getting any younger, and we like to travel,” he said. “It makes me mad that I can’t do what I’m accustomed to doing.” Thousands of Canadians are in the same frustrating position. Consider travel to the Yaraskovitches’ would-be destination, New York City. In 1996, 1,059,000 Canadians made it there, but in 1997—when the first bout of the Asian flu sideswiped the dollar— the number of Canadian visitors dropped 7.2 per cent to 983,000. This year, with the Canadian buck buying an even smaller bite of the Big Apple, New York’s convention and visitors bureau expects the number to plummet a further 10 per cent to 880,000. That trend worries the officials who promote the city’s huge tourism industry. “The Canadian dollar is clearly weak against the U.S. dollar,” said Nell Barrett, vice-president of communications for the bureau, who notes that Canada is the city’s No. 1 source of foreign visitors. “The Canadian market is still very important to us, but it’s been going down consistently.” Some American destinations are scrambling to find ways to continue to lure their usual quota of Canadian customers. Several New York state golf courses across the St Lawrence River from Kingston, Ont, have been accepting Canadian money at or near par to get Canadian golfers back in the swing. ‘We’d rather have a houseful of golfers at a discount rate, than an empty house at full rate,” says Doug Horton, who owns the Thousand Islands Golf Club on Wellesley Island, N.Y. Even Mickey is missing his Canadian friends. Roger Dunbar, director of marketing and sales for Walt Disney Co. of Canada in Toronto, says the fall of the dollar is “a major concern.” In a bid to offset the effect of the exchange rate, Dunbar said Disney is working with airlines and other companies

to design package deals for shorter stays at its theme parks in Florida, take advantage of cheaper airfares, and direct visitors to less expensive hotels. “We’re trying to be proactive in approaching the crisis,” he said. ‘We want to assure people that we’re offering them the best value.”

Becoming unable to afford a week in the Magic Kingdom or weekend on the Great White Way might seem a trifling concern. But the sense of being trapped at home undermines a feeling of freedom enjoyed, and largely taken for granted, by many Canadians. Scott Meis, director of research for the Canadian Tourism Commission, says Canadians, more than most nationalities, view travel—especially to the United States—not as a luxury but as the norm. International comparisons bear out the view. According to the World Tourism Organization, Canadians on average venture outside their own country about twice as often as the French do, three times as frequently as Americans, and five times the per-capita Japanese rate for trips abroad. One obvious reason is that since most Canadians live in a narrow band along the U.S. border, crossing that international boundary often becomes routine. As well, long, cold, dark winters have made sun-and-sand sojourns an annual ritual for Canadians who can afford to head south. Finally,

Meis suggests, the vast distances Canadians often travel within their own country’s sprawling geography can make a jaunt abroad seem that much less daunting.

For a growing number of Canadians, of course, travel to the United States is not a break from working life, it is an essential part of it. Phil Bernard, president of Winnipegbased Westsun International Inc., is one of the free-tradeBernard

era entrepreneurs whose corporate strategies assume the border is all but irrelevant—except when it comes to a sudden change in the exchange rate. Westsun sells technical services to the entertainment industry, including sound and light systems for Broadway extravaganzas like Ragtime and The Lion King and rock shows like Sarah McLachlan’s Lilith Fair tour. Making money in the States means Westsun, like any Canadian exporter or service company active there, earns a fat premium when U.S.-dollar profits are repatriated and converted into Canadian currency. “But there’s the other side of the business,” Bernard points out. ‘When we sell a job in the United States, it costs that much more to fly there, to stay in hotels there. When we buy equipment in the U.S., the price just went up.”

A businesslike tallying up of how exchange rates change the bottom line is one thing; assessing how the currency’s value can play on the national psyche is quite another. Canadians have had a complex relationship with their money since 1685, when the governor of New France,

faced with a shortage of coins from the old country, cut playing cards into quarters, signed his name to the pieces, and created the colony’s first indigenous currency. Americans might joke that the colorful Canadian bills of today still look like play money, but cross-border comparisons have not always favored the United States. Graham Esler, chief curator of the Bank of Canada’s currency museum, says that when the American dollar lost value during the Civil War, depreciated U.S. coins, which had previously circulated in Canada at par with Canadian silver, were rounded up in a joint effort of business and government, and shipped out of Canada to prevent them from destabilizing commerce.

It has been 25 years, though, since the Canadian dollar last enjoyed rough parity with the U.S. dollar. McCallum contends that the steadily widening exchange-rate gap has closely matched a long-term slide in world prices for natural resources. Since Canada’s export earnings depend more than America’s on raw materials or semi-processed prod-

FREE

ADVICE

Like the weather, everybody talks about the dollar, but nobody seems to be doing much about it. Many Canadians believe it is up to the federal government to find a way to halt the dizzying descent of the loonie.

But what can—or should— Ottawa actually do? Maclean’s asked five Canadians who have followed the loonie’s fortunes closely. Their suggestions:

JOHN CROSBIE

CONSERVATIVE FINANCE MINISTER, 1979

“Somebody should do something to help the Canadian dollar, and if it’s not the Canadian government then who is it going to be? We’ve had a shrug of indifference from the government. I’d like to see the government make clear what they plan to do in the fiscal area. Are they going to reduce our huge debt or our huge interest burden? They’ve had the nerve to suggest there’s a fiscal dividend. But they haven’t made clear what they’ll do with it.

“Under [former prime minister John] Diefenbaker, the dollar was 92.5 cents (U.S.). It was alarming in 1962 that it was at 92.5 cents. But the Diefenbaker dollar was a hell of a lot better for Canada than the Chrétien currency is.”

SIMON REISMAN

CHIEF TRADE NEGOTIATOR

THE CANADA-U.S. FREE TRADE AGREEMENT

“Canadian interest rates are lower than in the United States. We still have high unemployment here, so it is appropriate for us to have lower rates. So the economics part is right. But Thiessen should have done what he had to do and not talk so much. Speeches by Thiessen and Chrétien have had a negative influence on the Canadian dollar. Once you’ve talked, it’s hard to put the genie back in the bottle.

“I would do nothing. It will find bottom somewhere and people will begin speculating the other way. We’re a good country, a rich country. The Asian crisis won’t drive us into recession. I don’t think it would go much further if we did nothing.”

ucts, the Canadian dollar is more vulnerable when commodities like wood and minerals command lower prices.

Charting the devaluation of the Canadian dollar’s symbolic weightiness, relative to its American cousin, is more subjective. Americans tend to view their dollar as the true flag of an economic superpower, and they have instinctively rejected past attempts to put a one-dollar coin in their pockets. Canadians embraced the introduction in 1987 of the loonie—a seven-gram disc of nickel coated with a copper-tin alloy—and have affectionately poked fun at it ever since. “It’s no longer mon ey, it’s change,” says Esler.

The generally easygoing Canadian attitude towards the dollar’s woes can seem odd to outsiders.

The New York Times published an article in June remarking with some surprise on how Canadians seemed not to care much if their dollar fell. On a recent business junket to Cleveland,

glasses purchased at Wal-Mart Tickets to the movies (2 adults, 2 children)

Canadians may be less prone to getting worked up about their currency. Still, federal politicians have lately learned—the hard way—that even the loonie needs to be treated with a little sensitivity. Early last

HITTING WHERE IT HURTS

If a family of four from Calgary spent some holiday time in Denver, the exchange rate means they would pay more than for equivalent items at home. Some examples (taxes not included):

CALGARY DENVER Four nights at a Holiday Inn $416 $630 (regular rate) Mid-size car rental, four days (includes $304 $486 insurance and one extra driver) Dinner for four at Pizza Hut (large $24 $27 Supreme pizza, plus round of soft drinks) Foster Grant sunglasses purchased $6 $12 at Wal-Mart Tickets to the movies (2 adults, $27 $30 2 children)

month, Prime Minister Jean Chrétien WHERE adopted his signature offhand tone when asked about the dollar hitting a succession HURTS of record lows. “There’s no critical threshold for the dollar,” Chrétien told reporters. Calgary spent some “Obviously, fewer Canadians are going to exchange rate means Maine. They are instead going to New for equivalent items Brunswick.” Currency markets respond(taxes not included): ed by whacking the dollar down another CALGARY DENVER notch on news of Chrétien’s comments, and political opponents and editorialists derided him for sending the wrong sig$416 $630 nal. Then last week, it was Reform Leader Preston Manning’s turn to face criticism for his stance on the dollar—in the Opposition leader’s case, for seeming too $304 $486 concerned. Addressing a business crowd in Hong Kong, Manning described the dollar’s drop as having “all the makings of a major economic crisis.” That prompted some business groups and private $24 $27 sector economists to take Manning to task for undermining Canada abroad. But the tourists on the lawn of Parliament Hill last week were paying less at$6 $12 tention to the nuances of the political give-and-take on the front pages than to the hard truths of the exchange rates printed in the business sections. “We follow the dollar a bit because we do like to $27 $30 go to the States quite a few times over the year,” said Lee Stewart, 41, of Blenham, Ont. For Stewart, his wife and two children, the eight-hour drive to Ottawa was the consolation prize when a trip to visit theme parks in Ohio became too expensive. Grant Dunn, 39, of Yarmouth, N.S., travelling with his family of six, was planning to drive home from Ottawa through the United States. “We scratched that because of the dollar,” Dunn said. “Since we left home on July 12, we’ve been watching it dip.” So much for this vacation season. The question now is whether the dollar will bounce back again by the time the snowbirds are ready to fly south in the coming winter. Or by next summer. Janice Yaraskovitch, Alyson’s mom, is not counting on it. “Maybe we’ll go out West next year,” she says. “There’s lots to see in Canada.” New York might just have to wait.

BRIAN BERGMAN

ANDREW PHILLIPS

SYLVIA OSTRY CHAIRWOMAN OF THE CENTRE FOR INTERNATIONAL STUDIES, UNIVERSITY OF TORONTO

“There is not much that can be done. We can deal with it through a tight monetary policy, or intervention which would have to be made jointly with the United States.

“I think that the decline is a secular decline in the value of the dollar and not a short-term decline. There needs to be a much more focused look at the implications, our basic competitiveness, our productivity performance, the extent to which markets associate us as only raw-material producers; in other words a much more coherent approach, which will be more complex than the short-term monetary policy.”

CATHERINE SWIFT

PRESIDENT, CANADIAN FEDERATION

OF INDEPENDENT BUSINESS

“What we’ve felt for a while is that Ottawa should be stimulating the economy through tax cuts. And they should be paying down debt. That should be their focus.

A low dollar is one way to stimulate an economy, but another way is by cutting taxes. The federal government has been stingy in this area. We have to start to reverse the momentum of tax increases.”

LEROY LARSEN PRESIDENT, SASKATCHEWAN WHEAT POOL

“I’m concerned about the sliding dollar. I don’t know what Ottawa can do to help without other adverse sideeffects. I don’t want higher inflation.

“For farmers, I’ve heard them say that a pulley that they bought from the United States last year for $19 is costing $32 dollars this year. So importing machinery parts is driving the costs up already for our farmers.

“I would also like to see Ottawa identify the value of Canada. We have a strong economy and this should be better reflected in our dollar. We should tell a better story and boost ourselves more.”