OTTAWA — The Canadian economy is still trying to catch up to its potential, with low commodity prices and weak global demand keeping growth subdued and providing few incentives for the Bank of Canada to adjust interest rates.
Governor Stephen Poloz, along with other members of the policy counsel, acknowledged as much on Wednesday by keeping the bank’s trendsetting-lending rate at 0.5 per cent — unchanged since July 2015 — with annual growth likely stuck at 1.1 per cent this year, but expected to pick up speed in 2017 and 2018.
“Looking through the choppiness of recent data, the profile for growth in Canada is now lower than projected in July’s Monetary Policy report,” the central bank said in its quarterly Monetary Policy Report. “This is due, in large part, to slower near-term housing resale activity and a lower trajectory for exports.”
Household spending remains an overarching concern for policymakers — this despite recent moves by Ottawa to tighten lending rules and cool prices in residential markets, focused particularly on Vancouver and Toronto.
“The federal government’s new measures to promote stability in Canada’s housing market are likely to restrain residential investment, while dampening household vulnerabilities,” the bank said.
However, many private-sector economists are taking a wait-and-see approach to the new rules, given concerns that new restrictions in the two hottest markets could cause purchasers to look farther out of the core centres and result in price pressures in those communities.
Even so, policymakers believe the tighter housing measures “should mitigate risks to the financial system over time.”
Also clouding the outlook is Canada’s below-par export activity — a hangover from the 2008-09 recession — and the central bank expects companies to experience weaker export growth in 2017 and 2018 as demand, both globally and in the United States, eases and businesses in this country experience “ongoing competitive challenge,” the bank said.
“Recent export data are improving but are not strong enough to make up for ground lost during the first half of 2016, despite the effects of the Canadian dollar’s past depreciation.”
The better news is the bank’s view that investment in the energy sector “appears to be bottoming out” as non-resource-based sectors — such as services industries — are “growing solidly,” according to policymakers.
As well, the rate of inflation — the prime focus of the bank’s policy mandate — continues to closely track the two-per-cent target, and is forecast to stay near that level in 2017.
The bigger picture, according to the MPR, shows a strengthening global economy and, importantly for Canada, a rebound in U.S. growth from weaker-than-predicted output in the first half of this year.
“Weak business investment and trade remain dominant themes in the global economic outlook … partly as a result of uncertainty over future prospects for global demand and ongoing structural adjustments in China,” the banks said.
Overall, worldwide economic growth is forecast to advance by 2.8 per cent this year, down from 2.9 per cent in the previous MPR, but strengthening to 3.2 per cent in 2017, but below the previous estimate of 3.3 per cent, while global GDP should reach 3.5 per cent in 2017 — unchanged from the July forecast.
The United States will likely experience GDP of just 1.5 per cent this year, not the two-per-cent pace predicted three months ago, but growth should rise to 2.1 next year and two per cent in 2018, unchanged from the bank’s earlier forecasts.
Not factored into the bank’s U.S. and Canadian outlooks is the impact of the divisive presidential American election in November and how it might affect the monetary policy of the Federal Reserve, which maintains that improvements in the economy point to a possible rate increase by the end of this year. As with the Brexit vote, policymakers monitor events and possible risks to global and domestic events —such as the U.S. election — but do not project the impact of those changes until they happen.
In the case of the June referendum in favour of the U.K. leaving the European Union, the fall out has yet not had much of a negative effect on the economy. Those countries in the Euro zone, which does not include Britain, is expected to growth at 1.6 per cent this year — unchanged from the Bank of Canada’s July MPR — while GDP in 2017 is now forecast at 1.3 per cent, up from 1.2 per cent in the earlier outlook.
China, the world’s second largest economy after the U.S. — although still categorized as a developing nation — continues to experience a transition in its economy, but remains the main driver of global growth. “Previously announced fiscal support and rapid credit expansion appear to be boosting growth in spending on infrastructure and in the housing sector,” the central bank said.