RATES ARE GOING TO RISE — BUT THAT’S NO BIG DEAL
Bank of Canada has been cautious during growth spurt, Kevin Carmichael writes.
Donald Trump may have changed the rules of politics, but luckily for Canadians, the laws of trade gravity are harder to bend.
A new survey of executives by the Bank of Canada — and the last significant economic indicator before policy-makers’ interest-rate decision next week — suggests most companies are tuning out the U.S. president’s harangues about commercial agreements and his threats to correct the alleged unfairness with tariffs.
Or at least they were between early February and early March, when the latest business outlook survey was conducted. That was before the U.S. and China squared off for a trade war, so maybe animal spirits have waned a little.
But heading into the spring, Canadian firms were transfixed by the prospect of the gross domestic product of their biggest market expanding three per cent this year, not Trump’s Twitter account. Seventy-one per cent of respondents told the central bank they had so far been unaffected by U.S. policy announcements or uncertainty about what the Trump administration might have in store. About nine per cent said they had been helped by policy changes, presumably last year’s tax cuts, various regulatory changes or both.
The Bank of Canada started asking the companies that participate in the outlook survey about the Trump effect a year ago and released the results for the first time in the quarterly report published April 9. The value of the Canadian dollar jumped on the news, probably because traders bet the positive vibe in the survey increased the chances the central bank will increase interest rates before the summer.
That was the right response. Governor Stephen Poloz and his deputies have been clear that they the intend to raise borrowing costs — the only question is the timing. Evidence that business confidence is buoyant even in the face of constant harassment removes a hurdle to nudging the benchmark rate higher — if not next week, then perhaps at the following policy announcement on May 30. With unemployment holding at the lowest rate in at least four decades in March, the economy probably can stand borrowing costs that are somewhat higher, especially since inflation is now brushing the central bank’s target of an annual rate of about two per cent.
“Results of the spring business outlook survey suggest that business sentiment continues to be positive, supported by healthy sales prospects,” the central bank said in summarizing the results. “Due to recent strong demand, capacity and labour pressures are evident in most regions.”
If policy-makers do opt to raise interest rates in the next few months, they likely would follow that decision with another extended pause, which has been their preference in the early stages of this cycle.
Poloz and his lieutenants are wary of moving too quickly in this post-crisis era, when no one is sure the economy works the way it did before the Great Recession. They ignored signs of strength for most of 2017 before raising the target rate by a quarter-point in July and September. They then skipped two meetings, raised the benchmark another quarter-point in January and paused again in March.
Before you panic about the central bank triggering a recession, keep one thing in mind: The next increase will put the benchmark rate at 1.5 per cent, which still would very low by historical standards.
On the whole, the survey suggests Canada’s economy is solid, if unspectacular.
Significantly more firms said sales grew over the past 12 months than reported a decline, and almost half of respondents said they would have difficulty meeting an unexpected increase in demand — less than 56 per cent the previous quarter, but still higher than usual over the past decade. That’s emboldened many executives to think about expansion: Hiring intentions and plans to invest in machinery and equipment over the next 12 months remain at elevated levels.
This is what Poloz hoped would happen by keeping rates low even as the jobless rate plunged. His former counterpart at the U.S. Federal Reserve, Janet Yellen, resisted pressure to raise rates faster and it paid off with a spurt of non-inflationary growth that created jobs for tens of thousands of marginalized workers.
Poloz thinks increased investment will keep inflation at bay by improving the ability of companies to keep up with demand. He’s watching closely more granular indicators such as long-term unemployment and youth employment because he’s hopeful stronger growth will create opportunities for groups that typically find it more difficult to win jobs.
To be sure, there are whispers of unease in the latest survey.
About 30 per cent of respondents say they could be hurt by U.S. policy, up from about 25 per cent in the middle of last year. There also is an enthusiasm gap, as some industries and regions appear to be doing better than others. On a couple of occasions, the authors of the survey mention that service providers are the most excited about the future. Meanwhile, the report notes that companies tied to oil said they expected last year’s rebound to slow because Canadian crude is trading at a big discount and because of undefined competitiveness issues.
The Bank of Canada will take those concerns into account as it decides what to do with interest rates over the next few months. For now, they probably aren’t reason enough to delay an increase for much longer. Canada’s economy has two years of solid growth behind it. Ultralow borrowing costs no longer are required.