For almost a year, the Bank of Canada has been expecting key pieces of the economy to fall into place. Unfortunately, this hasn’t happened.
Instead of the long-anticipated rebound in exports and business investment, growth has been low as every forecast, whether for Canada or 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. 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 the entire wedge of exports from the other sectors,” said Mr. Poloz, 58.
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 previous 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. This pattern has not been seen since September 2010 when policymakers cut their trendsetting interest rate to 1%.
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. Stating that the forecasts could change, the economists have ruled out any change in borrowing costs until mid-to-late 2015.
The quarterly Monetary Policy Report, 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. Nothing opaque about this. The bank has managed to provide investors with a clue that the odds of a rate cut are actually the same as those of a hike,” said David Rosenberg, chief economist at Gluskin Sheff and Associates.
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. 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.”
The bank said the Canadian economy is expected to grow 2.2% in 2014. Policymakers had earlier forecasts a 2.3% gain in GDP, after a 2% increase in 2013.
Globally, growth will be limited to 2.9% this year, down from the previous 3.3% estimate, the bank said. The United States — the largest market for Canadian goods and service — is estimated to advance 1.6%, considerably lower than the 2.8% forecast in the bank’s report in April, with severe weather conditions in the first quarter of this year blamed.
The eurozone, which climbed out of recession in 2013, is expected manage growth of 0.9% this year, again, at a lower rate than policymakers had anticipated in the spring. Similarly, but at a lesser degree for China, 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, investments and eventually, a more sustainable growth track.”
Those same policymakers have pushed back their timetables for eliminating the country’s economic slack 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. Given the downgrade to the global outlook, economic activity in Canada is now projected to be a little weaker than previously forecasts,” the bank said.
Source: Financial Post
The Canadian economy as a whole urgently needs increased business spending. Unfortunately, according to a C.D. Howe Institute report the amount of business investment happening varies widely across Canada’s provinces, helping drive robust growth in some provinces while barely outpacing public spending in others,.
The imbalance is another indicator of the growing gap between Canada’s provinces that are resource-rich and which attract high levels of business investment — and those whose economies have non-resource-related foundations, such as Ontario and Quebec, both manufacturing-oriented provinces.
Business investment is currently a significant issue in Canada because the Bank of Canada has identified it as a key driver of growth in the coming months. This is because neither consumers nor the government sector are able to contribute as much as in the past as they struggle with deficits and high debt levels.
In Quebec, Nova Scotia, Prince Edward Island and New Brunswick, public investment grew to almost equal the amount of private investment. Ontario and Manitoba’s public investment is over half of the level of private investment. However, the C.D. Howe report found that in Alberta, Saskatchewan and Newfoundland, private-sector investment has more than doubled relative to public-sector investment in recent years, and private-sector investment represents between 10% and 26% of GDP in these provinces,.
The study says there are significant long-term positives from business spending, as it commits a firm to a strategic plan going forward. “Large investments such as the oil sands, industrial plants or large office buildings require years of planning and building before completion,” it says. “The commitment to invest is also a good indicator of a firm’s willingness,” it adds.
The study says the relationship between public-sector investment and economic growth is “more ambiguous.” It says some types of public sector investment can foster economic growth, especially investment in infrastructure.
Source: Wall Street Journal