Poloz bullish that ratifying new NAFTA will improve Canadian business outlook
BOC governor looks back on damage inflicted by trade conflicts’ uncertainty
TORONTO Bank of Canada governor Stephen Poloz suggested Thursday that the ratification of a new North American free-trade deal is key to finally eliminating uncertainty that has hovered over businesses trying to make investment decisions since the election of U.S. President Donald Trump.
Following a lunchtime speech to a business crowd in Toronto, Poloz told reporters there was no question that uncertainty about the future of the North American Free Trade Agreement “began to bite almost immediately” after Trump came to office, as the president had made the renegotiation of the pact a top priority.
As a result, Canadian investment has been lower than what the Bank of Canada’s model has suggested it would be, Poloz said. There has been some “movement” this year, he added, which could be due to earlier progress on the trade deal, as well as to the federal government’s decision to implement faster writeoffs for companies.
“We’ll see in the fullness of time, but I think that the actual finalization and the ratification is crucial, because it’s an uncertainty thing,” Poloz said.
The governor’s comments came after top officials from Canada, Mexico and the United States earlier this week signed an agreement on a modified version of the new NAFTA, which now needs to be ratified.
Poloz told reporters that while some investment decisions have already been made and cannot be reversed, those that had been “put on the shelf” until the trade picture cleared up could make a difference to the economic outlook.
And although “we should wait and see it before we assume it,” Poloz said his presumption is that ratification would improve business investment sentiment in Canada.
A finalized free-trade deal would also follow substandard economic growth, or “serial disappointment,” since the global financial crisis hit a decade ago, Poloz said during his speech.
Population growth has slowed and recent productivity gains have not been big enough to offset this, Poloz told his audience. While there is the potential for greater productivity gains in the future with artificial intelligence and big data, based on past experience, they could be slow to arrive, he said.
“Besides the near-term risks around productivity growth are actually on the downside today,” Poloz said. “This is because trade conflicts, and the emergence of nationalist or populist policies more generally, threaten to reverse some of the prior productivity gains that were made through globalization.”
Tariffs are upending existing supply chains and could lead to less efficient ones, he continued. Uncertainty over trade policy and “critical institutions” such as the World Trade Organization is weighing on investment plans and economic growth.
The apparent forecast for slow economic growth is likely to mean low interest rates are likely to persist as well, Poloz added, although the governor stressed he was not making “a near-term prediction” about the Bank of Canada’s policy rate. “In any era, interest rates fluctuate around a trend line, and that trend line is determined by structural forces, not by monetary policy,” Poloz said. “What I am saying is that in this era, it looks like interest rates are likely to fluctuate around historically low levels.”
Poloz’s comments came after Canada shed 71,000 jobs in November, which pushed up the unemployment rate to 5.9 per cent. Poloz, though, said the one labour report had not dented the Bank of Canada’s confidence in the domestic economy.
“In view of the ambiguity of recent data (on target inflation and GDP, but a concerning job loss in the latest month), the Governor was wise to not commit any words to where policy rates will be headed in the near term,” wrote Avery Shenfeld, chief economist at CIBC Capital Markets.