Bank of Canada downgrades outlook
Central bank cites lower-than-expected exports and slowing housing sector for weaker forecast
The Bank of Canada held the interest rate at 0.5 per cent Wednesday but cut its economic forecasts through 2018, predicting a slower housing market and conceding the export sector is not rebounding the way it anticipated.
The central bank now expects the economy to grow by 1.1 per cent in 2016, down from the 1.3 per cent forecast in its July Monetary Policy Report, largely due to weakerthan-expected U.S. activity in the first half of the year.
Gross domestic product growth is expected to pick up to 2 per cent in 2017, and 2.1 per cent in 2018.
The bank now expects the Canadian economy to return to full capacity by mid-2018, about six months later than it had previously expected.
“The Bank didn’t cut rates today, but it is warning markets that it is only operating with a thin margin of error when it comes to what might prompt another ease in policy,” said Nick Exarhos, an economist with CIBC.
Bank of Canada Governor Stephen Poloz said he sees temporary economic impacts — such as the weakness in oil prices and a falling loonie — mitigating and longer-term, or structural factors, taking over in “an extended period of economic slack.”
The weaker outlook is due largely to slower-than-expected growth in the export sector and an anticipated slowdown in housing sales — two major engines of growth. The bank conceded that competitive challenges to exports are greater than previously thought.
Poloz acknowledged that old economic models have not accurately predicted export levels in the post-2008 world.
They do not account for challenges cited by many manufacturers such as deficient infrastructure, regulatory uncertainty, rising trade barriers, relatively high electricity costs and the unknown status of current and future trade agreements, he said.
“The level of exports is well below where we thought it would be now,” he said in a news conference Wednesday.
“More of our export challenges might be structural rather than cyclical as previously believed.”
When oil prices started falling late last year, taking the dollar with them, the manufacturing sector was widely expected to step in to fill the economic gap left by a slowdown in Alberta’s oilfields.
The bank noted that, since the oilprice crash, investment in the oil sector has dropped by about 60 per cent, but added that the economic drag is waning.
However, the loonie’s devaluation has failed to spark a manufacturing rebound the way many observers, including the central bank, predicted, as manufacturers grapple with a unique set of structural challenges formed during a long period of a high dollar. Canada lost about 8,000 to 10,000 firms, many of them exportoriented, during the high dollar peri- od and global recession.
The bank’s more pessimistic take on export growth lowered its overall projection for GDP growth by 0.6 percentage points by the end of 2018. It cited “composition of U.S. growth that appears less favourable to Canadian exports, and ongoing competitiveness challenges for Canadian firms.”
“The bank admitted what we’ve been saying for some time: Canadian exporters are struggling to gain market share in the U.S. because Mexican competitors have enjoyed an even bigger devaluation,” said Paul Ashworth, chief North American economist at Capital Economics.
The Mexican peso has decreased by 30 per cent since mid-2014, while the Canadian dollar has fallen by less than 20 per cent.
Recent export data shows the sector improving. On Tuesday, Statistics Canada reported a stronger-thanexpected 0.9-per-cent growth in August manufacturing sales. But, the bank said, the pickup has not been great enough to compensate for lost ground during the first half of 2016.
Meanwhile, the central bank expects the government’s recently announced mortgage rules to be a drag on the economy for the foreseeable future, reducing overall GDP growth by 0.3 percentage points by 2018, the end of its forecast period.
The changes, which require all borrowers to qualify at a Bank of Canada rate well above current bank rates, will tamp down housing investment
“The level of exports is well below where we thought it would be now. More of our export challenges might be structural rather than cyclical as previously believed.” STEPHEN POLOZ BANK OF CANADA GOVERNOR
as well as debt risks for households, Poloz said.
Poloz said the near-term economic costs of the new regulations act as a sort of insurance against the risk of overextended households magnifying the effect of a potential economic shock down the road.
“By paying a bit of a price there you help avoid something that could be much worse for the economy and therefore it’s a good deal,” he said.
Economists believe the bank will remain on the sidelines for the remainder of the year and many lean toward a rate cut rather than a rate hike when it does move.
“This is a bank that has precisely zero appetite for rate hikes, and seems to be keeping a flame alive for the possibility of rate cuts, should the need arise” said Doug Porter, chief economist at BMO.
“We continue to look for the (central) bank to keep rates unchanged through next year, with the earliest possible move up not until 2018.”
The Bank of Canada’s last overnight rate announcement of 2016 is scheduled for Dec. 7.