Taking the pulse of Canada’s economy

Is it cruising, chugging or decelerating? That’s what the BoC must decide ahead of its rate decision, Kevin Carmichael writes.

No one said the Bank of Canada’s shift to data dependency would be easy.

The professional watchers of Canada’s central bank, so confident in their near-term outlooks a month ago, turned tentative as November turned into December. A slew of recent events and releases, including the acute weakness of Canadian crude prices, have rattled the consensus that interest rates will be higher by January, if not as soon as Wednesday.

A close reader of Citibank’s Dana Peterson research notes will see the earth shifting beneath her feet. On Nov. 23, she reviewed Canada’s latest inflation numbers and advised her clients to get ready for an interest-rate increase at the Bank of Canada’s first policy announcement of 2019, scheduled for Jan. 9. Peterson sounded much less certain a week later, when Statistics Canada reported that a drop in business investment had slowed economic growth in the third quarter.

“We expect that hikes will continue, with the next in January, although with potential risk that a hike is delayed,” she warned in a note last week.

When Poloz and his deputies on the Governing Council raised the benchmark rate a quarter point to 1.75 per cent in October, many analysts decided the Bank of Canada had turned “hawkish,” a term traders use to describe central banks that favour raising interest rates over lowering them. They based this determination on the central bank’s decision to stop modifying its plan to take borrowing costs higher as “gradual.”

Carolyn Wilkins, the senior deputy governor, stated explicitly that “gradual” was erased because too many traders were beginning to assign the word meaning it didn’t deserve. Regardless, a narrative took hold that the central bank was speeding up its walk back to a more normal policy setting.

“For a central bank that says it wants to eschew ‘forward guidance,’ the Bank of Canada sounded pretty sure of itself when in hiked rates in October,” Avery Shenfeld, chief economist at CIBC World Markets, said in a note on Monday.

Shenfeld overstates the central bank’s cockiness. Seeking a new way to describe its outlook, it decided to state that the economy had strengthened enough that a return to a neutral rate — between 2.5 per cent and 3.5 per cent — had become a realistic possibility. (“Neutral” for central bankers is a theoretical zone in which borrowing costs create neither a headwind nor a tailwind for the economy.) That was always the goal. Poloz and Wilkins stressed that they remained unsure of how long it would take to get there because the economy was in an unusual state of flux.

The outlook remains unsettled. There is momentum, but the question is whether the economy is cruising, chugging, or decelerating.

“Our confidence in Canada is significant,” Andrew Williams, chief executive of DHL International GmbH’s Brampton, Ont.based Canadian unit, told me in a telephone interview on Nov. 19.

DHL had recently announced it had added a new daily direct flight to Vancouver from its main North American sorting facility in Cincinnati to keep up with demand. It also this year expanded the size of its warehouse in Winnipeg by seven times its original dimensions, to 27,000

Our confidence in Canada is significant . ... Absolutely, there is strength in the global economy.

square feet. “Absolutely, there is strength in the global economy,” Williams said.

Poloz likes anecdotal evidence, so he could be comforted to hear that one of the world’s biggest delivery companies is feeling good about things. The Bank of Canada is counting on exports and business investment to drive economic growth over the next couple of years. Both wobbled this summer, according to StatCan’s latest numbers.

“There are a few more clouds on the horizon,” Mark Chandler, head of Canadian rates strategy at RBC Dominion Securities, said in a research note Nov. 30.

Another one of those clouds is oil.

Chandler, Shenfeld and others expect the Bank of Canada will say more about the depressed price of Canadian crude this week, either in its policy statement, or when Poloz updates the central bank’s outlook in a speech in Toronto on Dec. 6.

Weaker oil prices are taking a human toll in Alberta. That will matter to the central bank. At the impersonal level of data, reduced income from exports will hurt exports, reduce corporate profits and curb investment.

But it is unclear the extent to which the situation in the oilpatch will affect policy that must be made for the entire country, especially now that the Alberta government has ordered oil companies to limit production.