Graph of the Week: Dutch Disease

In recent years, a debate has been brewing in Canada over whether or not the country is experiencing “Dutch Disease.” This economic concept suggests that a resource boom in an economy can negatively affect the country’s manufacturing sector due to a related increase in its currency’s value.  Below is a graph generated using Bloomberg data that relates Western Canada’s resource boom to the suffering Canadian manufacturing sector.

The strong correlation between the West Texas Intermediate spot price (orange), the North American benchmark oil price, and the Canadian dollar’s effective exchange rate (white) is striking.  As oil prices rise, foreign customers must convert more of their currency to the Canadian dollar in order to buy the same amount of oil, thus increasing demand and the value of the exporting country’s currency.  Manufacturing exports consequently suffer as foreign buyers start to look for alternatives to the increasingly expensive Canadian goods.

Superimposed over these figures is the number of people employed in the Canadian manufacturing sector (green) as a means of gauging the health of the industry. When people discuss Dutch Disease in Canada, what they are really concerned about is the associated loss of jobs.

Graph of the Week is a new initiative by the Markets team. On a weekly basis, we will publish a self-constructed graph that highlights a market trend or economic dynamic. The submissions are purposefully text-light, as the aim is to let the data do most of the talking and the reader reach their own conclusions.

Leave a Reply

Your email address will not be published.