‘Serially Disappointed’ About Canada’s Economy, Poloz Maintains Stimulative Rates

Exports, job growth of more concern while inflation and housing less so

OTTAWA—Bank of Canada governor Stephen Poloz says the economy is still not strong enough to stand on its own and will likely need the boost from super-low interest rates for longer than he thought even three months ago. 

The central banker said at a news conference following release of the institution’s monetary policy report and interest rate announcement on July 16 that the long-expected global recovery has been a “serial disappointment.” 

And that is keeping Canada’s economy from maintaining a steady growth rate. 

“Our serial disappointment with global economic performance for the past several years means that we remain pre-occupied with downside risks,” Poloz said. 

“Right now, we do not have a sustainable growth picture in Canada,” he added, citing exports, and particularly non-energy exports, as the critical sector that has yet to recover is keeping business from committing to new investments. 

The bank did as expected and kept its trend-setting interest rate at 1 percent. The rate has remained unchanged for almost four years.

But Poloz did not stand pat. The bank cut its April projections for global growth this year by four-tenths of a point to 2.9 percent, and for the U.S.—Canada’s most important foreign market—by more than a full point to 1.6 percent.

The effect on Canada was less dramatic, but still significant. Economic growth projections for 2014 and 2015 were trimmed by one-tenth of a point to 2.2 and 2.4 percent respectively.

The effect of the bank’s July 16 statements is to make it more likely that interest rates will remain unchanged into 2016. 

“Consequently, the economy is expected to reach full capacity around mid-2016, a little later than anticipated in April,” the bank said. 

Depressed Demand for Canadian Exports

The key reasons for the economic downgrade, said the bank, is that the world and particularly the U.S. had an “abrupt slowing” at the start of this year—the American economy actually shrank by an eye-popping 2.9 percent—and, while growth has resumed, the bounce-back is not sufficient to make up for what has been lost. 

For Canada, that will further delay the expected pickup in exports and business investment the bank had been counting on to put the economy on a sustainable growth path. 

In his news conference, Poloz repeatedly returned to the theme of the “serial disappointment” in the global recovery that has depressed demand for Canadian exports and that, in turn, has led business leaders to back away from investing due to a lack of trust in the economy. 

The outlook for exports and business investment, which the bank sees as connected, is also not strong, it said. 

“The recovery in exports over the projection horizon will continue to be drawn out,” it said. “The expected strong growth in energy exports and the return of growth to non-energy exports [such as manufacturing] will not be sufficient to fill the shortfall left by the weak performance of non-energy exports relative to foreign activity since the end of 2011.

While he remains confident of the future, Poloz described the economy as a patient that is in the middle of a “healing” process rather than one ready to spring out of a sick bed. 

Another key change from April is that Poloz does not appear to be as worried about the risk of super-low inflation, acknowledging that prices have risen faster and higher than it anticipated. 

But the bank remains convinced that the recent pickup to 2.3 percent, slightly above target, is driven by temporary factors, specifically a bump in oil prices and pass-through from a weaker loonie. Continued economic slack and heightened competition within Canada’s retail sector should dampen price pressures going forward, the bank said. 

It forecasts for inflation to be about 2 percent for the next two and a half years, and for core underlying inflationary pressures to remain below the 2 percent target until 2016. 

Job Growth Lagging

While the bank remains upbeat about the future, it is forthcoming about the soft spots in the Canadian economic landscape, particularly on the jobs front. 

It points out that the economy has only managed to eke out about 6,000 jobs a month during the past year, but that the record is actually worse than the number suggests. If not for tens of thousands of Canadians dropping out of the work force, the unemployment rate would be higher than the current 7.1 percent. 

There are about 100,000 fewer people in the prime 25-to-54-years age group employed or looking for work today than there were six months ago, the bank noted. 

“Continuing labour market slack is also reflected in subdued increases in wages,” it added. 

One positive in the bank’s report is that it expects Canada’s housing market to ease toward a soft landing, and that household finances will stabilize. However, it still warns that households remain vulnerable to adverse shocks due to the current high level of debt and elevated home prices. 

RECOMMENDED