Bank of Canada governor Mark Carney says suggestions that the Canadian economy and its heavy reliance on its supply of natural resources will suffer from so-called Dutch disease are wrong.
Dutch disease is named after a downturn in the Netherlands economy in the 1970s, when peaking natural gas prices were blamed for driving up inflation and driving down exports of manufactured goods.
In a speech Friday at the Spruce Meadows Round Table in Calgary, Carney said: "While the tidiness of the argument is appealing and making commodities the scapegoat is tempting, the diagnosis is overly simplistic and, in the end, wrong.
"Canada’s economy is much more diverse and much better integrated than the Dutch disease caricature. Numerous factors influence our currency and, most fundamentally, higher commodity prices are unambiguously good for Canada," the central bank governor said.
Paying the global price for oil
Carney went on to suggest Canada's challenge is to develop its commodities "intelligently and sustainably."
He said consumers in Eastern Canada are importing oil and paying the global price, at an average $35 premium to the price received by western heavy oil producers.
"New energy infrastructure — pipelines and refineries — could bring more of the benefits of the commodity boom to more of the country," Carney said.
On the topic of Canada's manufacturing decline, Carney said rising commodity prices account for only about half of the loonie's rise over the past decade.
Loonie gains on U.S. dollar fall
Carney said the central bank estimates that about 40 per cent of the Canadian dollar's appreciation stems from the fall in the U.S. dollar.
At the same time, the loonie gets an additional boost from the fact that Canada is viewed as a "safe haven" in a risky world.
Carney also used his speech and a subsequent news conference to repeat his call for Canadian businesses to spend more of their cash holdings.
"With the strongest balance sheets on record and benefiting from one of the most resilient financial systems in the world, the need for Canadian firms to build additional precautionary cash balances appears limited," he said in his speech.
Addressing reporters afterward on the topic of "dead money," Carney said: "I stand by every single word that I said."
"Look, the facts are the facts -- there's a lot of cash and there's a lot of work to be done," he said.