Poloz sees rebound from oil-price plunge
Export sector starting to flex muscles, says Bank of Canada governor
It was a pep talk, directed at the core of Canada’s economic downturn.
The country has lived through previous swings in energy fortunes, Steven Poloz told a Calgary business audience on Monday, and it will adjust much the same way to the current collapse in oil prices.
“Canada has seen this movie before,” the governor of the Bank of Canada said in a speech to Calgary Economic Development, a body funded by the city and privatesector partners.
“We’ve adjusted to rising prices, we can adjust to falling ones.
“These adjustment are never easy. They are often difficult and painful for affected individuals and their families. But they are necessary.”
Faced with lower prices, he said “companies may scale back investment and production. Ultimately, the lower prices will encourage demand, and the reduced investment will crimp future supply, leading to higher prices — and producers will ride the price cycle all over again.”
That scenario is being helped along by another Canadian trait: a weak currency.
“We can’t do much about resource price shocks. But our (floating exchange rate) policy can help the economy adjust to them. In particular, our floating exchange rate helps absorb some of the impact of the price movements.”
Poloz added that “for our part, the Bank of Canada will continue to promote low, stable and predictable inflation. Doing so is the best contribution we can make to helping promote both strong, steady economic growth and the flexibility needed to ease those adjustments and help our resourcesrich country thrive.”
Even when prices are falling, as they have been recently, Poloz said Canada’s natural “endowment represents a store of value and a source of future riches.”
In the past year, oil has lost half of its value globally and remains weak. Crude was trading slightly above US$46 a barrel on Monday.
The collapse in crude has forced producers — particularly in Alberta — to shelve major projects and cut employees. It has also cut into government revenues, provincially and federally, and pushed the Canadian economy into it first downturn since the 2008-09 recession.
TD Economics forecast Monday that Canada’s overall economy should snap back this year — due in no small part to our weakened currency and a growing recovery south of the border.
“Canada fell into a mild technical recession in the first half of the year, as low oil prices dragged down investment, and a swing in inventories overwhelmed an otherwise healthy economy,” TD said.
“While investment is likely to remain weak for some time, Canada’s export sector appears to be starting to flex its muscles, supported by rising U.S. demand and the low level of the loonie.”
TD is calling for annual growth of 1.2 per cent this year, followed by a gain of about two per cent in both 2016 and 2017.
Statistics Canada will release official GDP numbers for July on Sept. 30. In June, the overall economy regained momentum with 0.5 per cent growth, following five straight monthly declines in output.
Most economists have already acknowledged Alberta is in a recession, with other resources-dependent provinces such as Newfoundland and Labrador and Saskatchewan perhaps heading in the same direction.
Since the global collapse in oil prices, Poloz and his policy council have twice slashed their key interest rate by a quarter point — the first coming in January and the other in July — taking the central bank’s trendsetting lending level to 0.5 per cent.
The economy has already become the biggest political issue in Canada’s federal election campaign ahead of next month’s vote.
The Bank of Canada will announce its next rate decision on Oct. 21 — two days after the federal election — along with the release of its quarterly Monetary Policy Report, an outlook on the domestic and global economies.
“Being careful about speaking in the final throes of the election, Poloz didn’t say much that was new,” said Avery Shenfeld, chief economist at CIBC World Markets.
“On the Canadian dollar, Poloz was cheering the benefits of the past year’s weakening, but not saying anything about whether more would be needed in that direction.”
In a question-and-answer session on oil prices following his speech, Poloz said “you’ve got to believe that it’s better to have that stuff than not to have that stuff.
“So, when there’s an oil price shock — if you’re not a producer country — well it means if it’s an upside (price movement) that’s bad news for your economy. And if it’s down, it’s good news for your economy,” the governor said.
“When you produce it, it’s the other way around,” he said. “No matter where you are, you have to adjust when prices move.”