TORONTO – The price gap is closing between what Canadians and Americans are paying for the same goods, such as cars, books and lattes, thanks to the rapidly rising loonie, a new report shows.
BMO Capital Markets economist Douglas Porter said the price gap for a select basket of items between the two countries is now 6.8 per cent, down from 18 per cent for the same items a year ago.
“The biggest reason it has changed is the exchange rate,” Porter said.
The report is based on a 92-cent U.S. loonie, near where it was trading on Wednesday, compared to parity a year ago.
The average exchange rate in the first half of 2008 was 99.3 cents U.S., while the average for the past two year is about 92 cents U.S., Porter said.
While the narrowing price gap is good news for consumers, Porter points out the negative impact for many businesses.
“Besides posing yet another heavy-duty challenge to besieged manufacturers and the tourism industry, the resurgent loonie also threatens to make life miserable for domestic retailers,” Porter wrote in the report “Loonie’s Leap: Mind the (Price) Gap.”
“In theory, retailers could actually benefit from a stronger currency, as margins widen on falling costs. In reality though, as the loonie gets within sight of par, cross-border price comparisons become Canada’s second favourite national pastime, and relentless pressure mounts on top-line prices.”
Porter said the dollar’s 20 per cent rise in the past five months, its strongest such run on record, is behind the closing price gap.
For instance, a latte at Starbucks is now cheaper in Canadian dollars terms than in the U.S. However, a Michael Jackson CD set is more expensive in Canada.
Porter said the gap is narrowing as Canadian retailers rollback prices due to pressure from consumers who were frustrated by paying more for goods in Canada when the loonie is near parity.
The recent rise in the loonie will add more pressure to retailers to cut prices again.
“With the loonie rapidly homing in on parity again, the issue could quickly re-emerge, presenting a new and unwelcome challenge for shopkeepers just as Canadian consumers are gradually mounting a modest recovery,” he wrote.
Economists also say the rising loonie could slow Canada’s economic recovery as it adds even more pressure such industries as manufacturing and forestry that sells products into the U.S.