National Post (National Edition)
Look to Norway?
THE BOC SHOULD WATCH EVENTS IN SCANDINAVIA.
Those who complain that central bankers in North America say too much might be happier in Norway.
The Norges Bank explained this week’s decision to leave interest rates unchanged in 175 words, packed tightly into three paragraphs. “Overall, new information indicates that the outlook for the policy rate for the period ahead is little changed since the June report,” governor Oystein Olsen said. “The global risk outlook entails greater uncertainty about policy rates going forward.”
What else is there for a central banker to say, really?
Olsen raised interest rates in June; however, most of his counterparts around the world have spent the summer cutting them. The trade wars are choking the life out of business investment, industrial production, and global commerce.
A new report this week showed that Germany’s economy, the world’s fourth largest, contracted in the second quarter.
Stock markets tumbled Monday, rallied Tuesday, plunged Wednesday, stabilized Thursday, and held steady Friday.
Bond investors were demanding a higher yield to lend for two years than they have been for 10 years, suggesting they are more worried about what could happen to their money over the months ahead than they are years from now.
“I will be surprised if by this time next year, the U.S. economy hasn’t experienced a growthless quarter,” said Kit Juckes, a global fixed income strategist at Société Générale.
Yet important economic indicators in many big economies, including Canada, look pretty good.
Retail sales in the United States surged 0.7 per cent in July, the fifth consecutive monthly gain, suggesting the main engine of the world’s largest economy is ready to power through whatever headwinds come its way. As Americans
shopped, Canadians embarrassed all those real estate lobbyists who spent the winter and spring warning that stricter mortgage requirements were killing the housing market. Existing home sales rose 3.5 per cent from June, a solid reading, led by a ridiculous 26-per-cent surge in Vancouver.
Bay Street is getting restless to learn what the Bank of Canada makes of all of this. We haven’t heard from the central bank since the second week of July, when Governor Stephen Poloz and the rest of Governing Council left the benchmark rate unchanged, yet indicated grave concern over the trade wars. We won’t hear from them again until Sept. 4, the next scheduled policy announcement.
Their dilemma remains the same: Domestic indicators are strong and inflation is on target, yet the global economy is slowing. For the past few years, the Bank of Canada has been training investors to focus on the data, like it does. Poloz may now have to ask the public to pay less attention to the dashboard and focus instead on the horizon.
“If you were sitting in isolation on an island, you’d be saying (it’s) an environment in which you should be hiking interest rates,” Frances Donald, chief economist at Manulife Asset Management, said on this week’s episode of Financial Post’s Down to Business podcast. “But the rest of the world is cutting. So (the Bank of Canada) right now has to move its perspective away from what’s happening in the local economy, which still looks fairly strong, and focus on the global risks,” she said.
“If the U.S. goes down, Canada is going down with a six-to-12month lag. There is virtually no way to escape that.”
Is the U.S. going down? Federal Reserve chairman Jerome Powell characterized the Fed’s July interest-rate cut as an insurance measure, given weakness in global demand. But he had little bad to say about the U.S. economy itself, and expressed confidence that a “midcycle” adjustment would extend the longest economic expansion on record.
“I think that the U.S. economy has enough strength to avoid,” Janet Yellen, the previous Fed chair, told the Wall Street Journal this week. “But the odds have clearly risen and they are higher than I’m frankly comfortable with.”
The Bank of Canada probably has more in common with the Norges Bank for now than it does the Fed. Both oversee rich, mid-sized economies that rely on commodity prices and external demand to a greater degree than most developed economies. Both were inclined to raise interest rates until conditions outside their control upended their plans.
The Bank of Canada was forced to the sidelines last autumn by a sharp drop in oil prices and a nasty winter that paralyzed trade in North America and very nearly stalled the economy. Now, it’s facing depressed demand for exports that likely would snuff out a relatively recent rebound in business investment.
Poloz and Carolyn Wilkins, the senior deputy governor, have had a quiet summer, but they told us all we really need to know when they talked to reporters after the July policy meeting.
They made it clear that the trade wars were the most important risk, and they released a research paper that suggests the harm caused by an escalation of tit-for-tat tariffs would be greater in magnitude than the gains that would follow trade peace. So the Bank of Canada has an incentive to err on the side of stimulus. When asked if the central bank would drop interest rates as an insurance measure, even if most indicators were positive, Poloz responded in the affirmative. “The theory is there,” he said.
Still, the Bank of Canada will need some tangible evidence that the domestic economy is in trouble before it pulls the trigger. There is no way to model trade uncertainty, and policy-makers appear unwilling to risk blowing their inflation target on a hunch. “You see it in the data when you see it,” Wilkins said. “That means we need to adjust our forecast and adjust our expectations as we see the data going forward and we’ll continue to do that.”
Job growth has slowed over the past few months, but at a high level; the economy is essentially at full employment. Non-energy exports plunged in May, but they had surged in April.
The most recent data suggest companies were gearing up to invest fairly heavily this summer. Oil prices are down from July, but they haven’t gone over a cliff. All that suggests that if the Bank of Canada follows anyone in September, it will be the Norges Bank, not the Fed.