Poloz must play edgy waiting game
Economic contraction and urban real estate prices hem him in, writes Joe Chidley.
Stephen Poloz must be getting tired of hearing the phrase “between a rock and a hard place.” Unfortunately, it still applies.
On Wednesday, the Bank of Canada governor once again held the benchmark overnight rate at 0.50 per cent, right where it has been since last July. That surprised nobody, of course. While the U.S. Federal Reserve has been talking up further rate hikes, our central bank remains on hold, watching and waiting, waiting and seeing, a little uncomfortably, no doubt.
In the meantime, the Canadian economy is left to its own devices, monetary policy-wise. Which, given that it is shrinking, is kind of remarkable.
In its announcement Wednesday, the Bank pointed to the impact of the Alberta wildfires on the energy sector as hitting the economy to the tune of 1.25 per cent in the second quarter. Given that it had previously estimated one per cent growth in Q2, that means the Bank now expects a contraction.
And still the Bank is keeping its powder dry, not budging on rates even though it has room to cut if it really thought it had to.
The last time the economy shrank by 20 basis points or more was the first quarter of 2015; interest rates were lowered the following July. This time, the Bank expects the downturn to be more fleeting, and is putting its hopes on oilsands operations coming back online and Fort McMurray reconstruction to give the economy a third-quarter boost.
That might happen, of course. We will see. At the very least, however, the response to this downdraft shows just how selective Poloz — who not so long ago was criticized for the surprise cut in January 2015 — is going to be when it comes to moving on rates.
That gets us to the rock and the hard place, again.
On the one hand, the energy sector upon which Canada so heavily relies is still adjusting to a world of lower oil prices. Capital investment has been decimated in the oilpatch, and while crude prices have recovered lately, they are hardly in a place to create a spending resurgence.
Energy-producing provinces have paid the price. Alberta’s economy shrank by four per cent last year, Saskatchewan’s by 1.4 per cent, Newfoundland’s by more than two. Most economists expect Alberta’s GDP to contract again this year, and the fires of Fort McMurray won’t help.
The rest of the country isn’t doing so bad, especially Ontario and B.C., which have been growing by well more than two per cent. But just how not-bad the non-energy provinces are doing depends on how you look at it.
The Bank of Canada has been counting on (or hoping for) manufacturers to pick up the slack that lower energy prices created, by responding to accommodative interest rates, a weakened Canadian dollar and stronger demand from the United States. So far, though, that great transformation hasn’t really taken hold. Manufacturing sales and business investment this year have been poor, as they have been for much of the post-recession period.
If you were an old-school central bank governor, you might have a straightforward response to the “rock” of low growth: you’d lower rates.
But if you did, you’d encounter the same “hard place” Stephen Poloz has been facing, and that is real estate in Vancouver and Toronto. Driven by demand — at least some portion of it from international buyers — and low interest rates, those markets are red hot. Driven by sky-high mortgages, Canadians’ household debt to disposable income rose to 165.4 per cent last quarter. With housing prices still rising, that number looks poised to increase this quarter.
If the Bank lowered rates now, it would only stoke the flames of housing prices in Vancouver and Toronto and of consumer debt loads.
The best hope for the Bank and the economy, perhaps, is that the Fed gets back on track and raises rates, as it has lately been threatening. That would do some of Poloz’s work for him, by weakening the loonie and making exports more competitive. But even if the Fed stands pat, don’t be surprised if the Bank of Canada stays in “wait and see” mode.
In other words, sitting between a rock and a hard place might not be the cosiest perch for Stephen Poloz. But it’s the only one he’s got.