There are things even the BOC can’t fix
Rate cut might not be in the offing despite economic jolts, Kevin Carmichael writes.
The economic stimulus debate got real in a hurry.
Statistics Canada on Friday reported that economic growth slowed to an annual rate of 0.3 per cent in the fourth quarter — stall speed — as the trade wars choked exports and business investment.
That wouldn’t be such a worry if, by Canadian standards, all hell hadn’t broken loose since the end of last year.
Marc Garneau, federal transportation minister, this week said that if you lined up the freight cars idled by the various rail blockades this month, they would stretch from Ottawa to Montreal. Teck Resources Ltd. alluded to the Wet’suwet’en protesters and their sympathizers when it pulled its application to build an oilsands mine in northeastern Alberta.
“It does kind of send a message to the outside people that Canada’s probably not the best place to invest,” Don Walker, chief executive of auto-parts maker Magna International Inc., told reporters in Toronto this week.
But, frankly, these developments are sideshows compared with the panic in global financial markets over COVID-19, which is on the verge of becoming a pandemic. Wall Street stock prices lost more than 15 per cent since touching a record a week ago, and the Canadian dollar lost more than two per cent of its value, dropping to about US74 cents, its lowest level since June.
Central bankers could probably look past the protests. It’s better that goods pile up due to confrontational politics than lack of demand. In that way, the economic impact of the First Nations blockades is no different than backlogs caused by weather and strikes: It’s lost output, but it’s temporary.
Teck’s decision is emblematic of deeper issues, one of which is the very real prospect that global oil prices have plateaued at levels that make digging for more bitumen an unprofitable proposition. Lower interest rates can’t do anything about such structural changes. Statcan on Feb. 27 released a report that showed companies planned to increase capital spending by about three per cent in 2020, an uninspiring result, but one that was pulled down by oil and gas companies. Remove that industry, and investment intentions were at a record high, according to Marc Pinsonneault, an economist at National Bank.
COVID-19 is something else entirely.
The global economy grew last year at its slowest pace since the financial crisis, and mass closures of factories, shops and airplane routes to limit the virus’s spread are dashing hopes of a rebound in 2020. Kevin Warsh, a former governor at the U.S. Federal Reserve, wrote in the Wall Street Journal on Wednesday that the Fed should lead a coordinated stimulus effort by the world’s major central banks. “The window to contain the virus inside China has long since closed,” he said. “The window to mitigate its effects on the global economy remains open — but not for long.”
Yet the Bank of Korea left its benchmark rate unchanged at a meeting this week, and Christine Lagarde, president of the European Central Bank, told the Financial Times that there isn’t enough evidence yet to say that the virus represents a long-lasting shock. Timothy Lane, a deputy governor at the Bank of Canada, had a similar assessment. “I would say at this point we don’t know enough about the transmission, we don’t know enough, even given the transmission, about how economic behaviour is going to be affected,” he said on Tuesday.
Lane and his counterparts on the central bank’s Governing Council are scheduled to release a new statement on interest rates on March 4. Seven of the 10 academics and Bay Street economists on the C.D. Howe Institute’s shadow policy committee on Thursday said the Bank of Canada should drop the overnight rate a quarter point to 1.5 per cent next week, the first time a majority of that group has recommended a cut since 2009. The “principal focus” of the group was the need to get ahead of the virus, the institute said in a statement.
The price of assets linked to short-term interest rates has dramatically shifted and now implies that investors anticipate an interest-rate cut next week, said Simon Harvey, an analyst at Monex Europe Ltd. “Next week’s meeting is too pre-emptive in our view, but that suddenly runs against the market consensus,” he said in an email. It would be odd if the Bank of Canada showed more concern about the economic impact of the virus than its counterparts in South Korea and Europe, two places where COVID-19 has caused observable harm. Then again, events were evolving with unusual speed. At 2.30 p.m. on Friday, the Fed chairman, Jerome Powell, issued a statement to say that the Fed “was closely monitoring” the situation and that “we will use our tools and act as appropriate to support the economy.”
If Powell’s intervention fails to calm markets, the Bank of Canada could feel compelled to act. Canada’s central bank is capable of surprises: For example, it cut interest rates in January 2015 when no one was expecting it.
Coincidentally, Lane was the last policy-maker to speak before that decision, just as he was the choice to utter the central bank’s final words before entering its customary blackout period ahead of next week’s announcement.
Back in 2015, Lane might have let a clue slip into his remarks by stating that “we see important risks to Canada’s economic outlook stemming from the recent decline in the price of oil and other commodities.” This week, he said nothing about the economy in a speech on digital currencies. In an interview, he said he agreed that the rail blockades and COVID-19 were negatives, but added “we’ve also had economic data coming in which has been not too much out of line with what we had been predicting.”
The Bank of Canada’s updated forecast in January predicted the economy had slowed to 0.3 per cent in the fourth quarter.
However, the expected rebound to growth of 1.3 per cent in the first quarter probably isn’t going to happen. The headwind from the blockades will go away, but the economic effects of the virus could get worse. They might not worsen enough in a few days to justify an interest-rate cut immediately. But if central banks as a group decide that stimulus is necessary, the Bank of Canada will be among them.