Finacial Post - Gordon Isfeld | July 16, 2014
OTTAWA — For almost a year, the Bank of Canada has been expecting key pieces of the economy to fall into place. That hasn’t happened.
Instead of the long-anticipated rebound in exports and business investment, growth has been tepid as one forecast after another — for Canada and globally — failed to deliver as advertised.
“Right now, we do not have a sustainable growth picture in Canada,” Stephen Poloz, the central bank governor, said Wednesday in an unusually blunt assessment of the economy.
The hoped-for sustained recovery in the United States and Europe, crucial for a rotation back to this country and spurring moves into new markets, and taking the weight of growth off Canadian consumers, has yet to take hold.
“The most important thing has been the failure of exports to recover,” he told reporters in Ottawa, after delivering the bank’s latest interest rate decision — no surprise, no change — and releasing its closely watched quarterly economic outlook, which pushed back any significant improvement until “around mid-2016.”
“There’s no question that with higher global prices for energy, higher Canadian terms of trade, that’s one positive, natural force that’s working its way through our economy,” said Mr. Poloz, 58.
“Over time, we know the energy sector will get bigger and bigger, as a share. But it seems unlikely that it will be sufficient to fill all of the wedge of exports from the other sectors.”
The current economic environment in Canada is part of the “serial disappointment” that has been playing out globally, he said, and one he has witnessed since taking over from Mark Carney in June 2013.
In its latest assessment, the Bank of Canada said earlier concerns that weak price gains could lead to a round of deflation have dissipated — along with the likelihood that borrowing costs might decline rather than rise, a pattern not seen since policymakers last cut their trendsetting interest rate to 1% in September 2010.
Instead, Mr. Poloz and his policy team maintained their wait-and-see stance, leaving that key rate unchanged and maintaining a neutral stance on future movements. Economists have ruled out any change in borrowing costs until mid-to-late 2015. But those forecasts could change.
The quarterly Monetary Policy Report [MPR], released at the same time as the interest rate decision, noted the bank “is neutral to the timing and direction of the next change to the policy rate, which will depend on how new information influences the outlook and assessment of risks.”
That statement could be seen as uncharacteristically blunt for Canadian central bankers.
“One has to give Stephen Poloz credit for penning meaty policy press statements,” said David Rosenberg, chief economist at Gluskin Sheff and Associates.
“Nothing opaque about this. The bank has managed to step up its dovish rhetoric and provide investors with a clue that the odds of a rate cut are actually the same as those of a hike.”
Avery Shenfeld, chief economist at CIBC World Markets, said Mr. Poloz and his team “didn’t say anything specifically about the Canadian dollar, but they said that anything that hurt our competitiveness would be a risk to getting exports going.”
One has to give Stephen Poloz credit for penning meaty policy press statements
“You can read between the lines: A stronger currency would be one of those risk factors we would rather not face.”
Mr. Shenfeld added: “We’ve been relying on debt-financed household spending and homebuilding to drive the economy. We can only live in so many houses and condos at the same time, and we can’t run-up household debt forever.”
The bank said in its MPR that the Canadian economy is expected to grow 2.2% this year. Policymakers had earlier forecasts a 2.3% gain in GDP, after a 2% increase in 2013.
The eurozone, which climbed out of recession in 2013, is expected manage growth of 0.9% this year — but, again, at a lower rate than policymakers had anticipated in the spring. Likewise for China, but at a lesser degree, as the 2024 advance was lowered to 7.2% from 7.3%.
“Given the downgrade to the global outlook, economic activity in Canada is projected to be a little weaker than previously forecast,” policymakers said Wednesday. “However, the bank still expects that the lower Canadian dollar and a projected strengthening in global demand will lead to a pickup in Canadian exports and investment and, eventually, a more sustainable growth track.”
Those same policymakers have pushed back their timetables for eliminating the country’s economic slack — the difference between production capacity and actual output levels — and reaching their inflation targets to “around mid-2016,” from their “early 2016” forecast in the previous report in April — a threshold level that had already been revised from a mid-2015 projection in the bank’s quarterly report before that.
Both the Consumer Price Index and the so-called core inflation reading, which strips out many volatile items, are produced monthly by Statistics Canada. Policymakers follow those inflation trends, with the ideal level being 2%, midway between a broader range of 1% to 3%. CPI has recently overtaken the 2% point and the core rate has been closing in on that level.
“Over the next two years, inflation is projected to fluctuate around 2% as the temporary effects ease and the downward pressure from economic slack and heightened retail competition gradually dissipates,” the bank said.
“Given the downgrade to the global outlook, economic activity in Canada is now projected to be a little weaker than previously forecasts.”