The chief economist of one of Canada's largest banks pointed the finger Wednesday at Mark Carney for a monetary policy that pumped up house prices and the loonie while hurting Canada's manufacturing output in the long run.

In a recent note, CIBC's chief economist Avery Shenfeld said monetary policy under Mark Carney's watch at the Bank of Canada left the economy in worse shape today than it could otherwise have been.

Canada's largest trading partner, the U.S., is finally showing signs of robust expansion after a lengthy recession and recovery. But Canada's economy isn't taking as much advantage of that as it normally would, because there is less production capacity available to be ramped up at factories.

Strong loonie hurt factories

One of the effects of the central bank's action under Carney's helm was a large run-up in the value of the Canadian dollar. The loonie repeatedly traded above par with the U.S. greenback, spiking above 105 cents US a number of times in 2011.

The massive amounts of stimulus at the time were drawing money away from the U.S. dollar and pumping up the value of almost every other currency against it, the loonie included.

While the suddenly strong loonie had good and bad effects on many aspects of Canada's economy, one area where it was a definite negative was in manufacturing. A strong currency makes Canadian goods more expensive internationally, which makes it a tougher sell for a company that depends on exports to decide to expand operations here. 

But Shenfeld notes that unlike other countries which took steps to offset it, Canada's central bank at the time took a hands-off approach and allowed the loonie to rise unimpeded.

"Rather than intervene to neutralize the impact of hot money capital flows on the exchange rate (as the Swiss did) the Bank of Canada tried to offset the impact ... by keeping interest rates low enough to stimulate housing and domestic consumption," Shenfeld said.

The result, he said, was the ensuing real estate boom, as cheap lending gave people an incentive to borrow. Those moves also came at a time when companies were making long term decisions "on where to retain plants," Shenfeld said, "and where to shutter them for good."

"In effect, monetary and exchange rate policy traded off more condos for fewer factories," he said in the note.

It's that lack of manufacturing capacity that's now holding the economy back, as Canada is less able to expand quickly to increased demand.

In recent public statements, Carney's successor Stephen Poloz and other bank officials have speculated that part of Canada's difficulties returning to pre-recession levels in exports is that there are about 9,000 fewer Canadian exporting companies in existence than was the case in 2008, and others have ramped down production capacity.

The impact of such an exodus is that even if foreign demand for Canadian products increases, there simply aren't enough companies around to fill it.

Manufacturing woes have improved a bit lately as the dollar has dropped back to a more "appropriately valued" level, as Shenfeld puts it, around 90 cents US.

"But given how infrequently production location decisions come up, the legacy of earlier plant closures will be with us for years to come," he said.

CIBC is expecting the Canadian economy will expand by 2.1 per cent this year. That's about a half a percentage point less than what the Bank of Canada is expecting.

With files from The Canadian Press