Economists explain that the Canadian economy is thriving despite the strong dollar and high commodity prices because it is more flexible and adaptable than in past episodes under similar conditions.

In a new report, UBS Securities Canada Inc. explains that the economy is still doing well despite the fact that the dollar is at US90¢, because, “In the past, higher commodity prices were a poster child for what was actually a wider inflation problem rooted in weak productivity and misdirected economic policies. Since these structural issues have been addressed, core inflation is moderate, which in turn has allowed nominal and real interest rates to remain low. Thus, we have the benefits of high resource prices, without the side effects.”

National Bank Financial says, in a report of its own, that the retail sector is currently benefiting from a significant wealth effect, caused by an increase in the openness of the Canadian economy. “This will attenuate the negative effects of the loonie’s rise,” it says. It reports that, according to Statistics Canada, the rise in consumers’ purchasing power due to the loonie’s strength saved Canadian households $3.5 billion since 2003.

“In short, Canada’s economic resources are being effectively reallocated, the job market is strong and consumers are benefiting from a rising currency. It appears that “Dutch Disease,” alone, is unlikely to slow Canada’s economy,” NBF concludes.

UBS warns, “The laws of economics have not been repealed, however, as the rising [Canadian dollar] has led to a plunging trade balance in volume terms, and a tourism deficit just starting to balloon.”

NBF also warns, “As in the 1970s, the loonie’s rise and the improvement in Canada’s terms-of-trade will increase regional disparities. In addition, manufacturing should under-perform services. Quebec and Ontario, home to the lion’s share of Canada’s manufacturing base, will no doubt do less well than the country as a whole.”

“Nonetheless, the combination of high resource prices and a strong structural position suggests Canada could outperform the U.S. in a downturn, as occurred in the mid-1970s even though the Canadian dollar exceeded par,” UBS concludes.