Poloz, like the rest of us, stuck in wait-and-see mode

For a guy whose credibility has been questioned — not always justifiably — since pretty much the day he took the job, Stephen Poloz certainly plays the part of a dour central banker quite convincingly.

On Wednesday the Bank of Canada Governor delivered what by just about any measure was a remarkably upbeat outlook, and didn’t even crack a smile.

The Canadian economy expanding by 1.4 per cent in 2016? Global growth on the horizon? Interest rate policy working ( or at least worth waiting to see)?

Poloz should have been jumping up and down on the table. Instead, he responded in measured tones to reporters’ questions following the BoC’s rate announcement, pointing out the caution implicit in the bank’s projections, and noting that they are more modest than those of the International Monetary Fund.

The IMF earlier this week pegged Canada’s 2016 GDP growth at 1.7 per cent.

The BoC’s take is pretty much the same one it has held since October. It is holding rates steady while the impact of previous monetary easing, the depreciating Canadian dollar and dropping oil prices work through the economy.

Yes, there are risks — China, further oil declines, housing — but there are also positives: a U.S. recovery that seems robust, for instance, as well as signs that Canada’s non- resource sectors are benefiting from the low- flying loonie and cheap money.

But Canadian investors, who have watched equity markets not just here but around the world take a beating for weeks, might be wondering what the BoC is seeing that they don’t.

What we might have here is a situation. Policymakers are signalling positive, though slow, growth. In contrast, the markets may be signalling a recession in the works.

In the U. S., the S&P 500 is flirting with the bear, down about 14 per cent from its 52- week high. The S& P/ TSX composite index crossed the threshold for a bear market — down more than 20 per cent — two weeks ago.

The resource- heavy TSX’s fall is clearly being driven by still - plummeting oil prices, but the sell- off has been broadly based. Yes, the energy sub- index is down more than 35 per cent over the past 52 weeks, but also in negative territory are utilities, financials, telecommunications, c onsumer discretionaries and income trusts. The Diversified Metals and Mining i ndex is down almost 60 per cent over the past year.

What’s holding its own? Health care and IT are basically flat, which is saying something, while boring old consumer staples — a classic non-cyclical sector — has managed a 10-per-cent gain.

Historically, the rule is that bear markets and corrections ( markets down more than 10 per cent) precede recessions. That doesn’t necessarily make markets good predictors of economic downturns, however. It may be that corrections/ bear markets precede all recessions, but not all corrections/ bear markets are followed by recessions.

A recent study by S& P Capital IQ looked at the predictive powers of 12 bear markets and 19 corrections on the S& P 500 between 1948 and 2009. In all, those events were followed by a recession less than a third of the time.

Bear markets were better leading indicators of downturns than corrections were, but still weren’t that great at it — 33 per cent of them were followed by no recession at all.

Oh, and when bear markets or corrections were followed by recessions, they typically did so by more than seven months, according to the study.

No doubt, a recession is usually bad for markets, but remember the TSX climbed t hrough Canada’s 2015 downturn, when GDP marginally contracted.

Perhaps markets don’t really care that much whether the economy is growing or not. After all, with growth hovering so close to zero, do a few points in either positive or negative territory really make that much difference?

In the end, the reality of low growth also speaks to monetary policy, and to the wisdom of Stephen Poloz’s patience.

Rates are already at 0.5 per cent, so would another 25- basis- point cut change anything, besides signalling that things are worse than we thought?

The currency is already severely devalued. Capital expenditures in the energy sector have been more than halved, and business spending in general is poor despite years of cheap money. Even cheaper money isn’t likely to bring back investment in facilities to produce more stuff that nobody wants to buy.

At this point, it looks like a rate cut would simply be a case of pushing on a rope. Forces beyond the central bank’s control are driving markets ( and the Canadian dollar): oil prices, China, and the soaring U.S. dollar and its potential impact on American corporate earnings.

That leaves the Bank of Canada in wait- and- see mode, along with the rest of us, hanging on to cautious optimism that the world will unfold as it projects.

And, at the very least, it will be keeping its monetary policy powder dry — just in case the markets are right this time around.