Stephen Poloz Outlines Uncertainties
On Monday, October 24, the Governor of the Bank of Canada (BOC), Stephen Poloz, testified before the House of Commons Standing Committee on Finance and painted a dire outlook for the Canadian economy.
In his opening statement, Poloz said there have been two developments since his last appearance in front of the committee that led the BOC to downgrade the Canadian economy.
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Poloz said the first issue was “trajectory for exports.” He added “After a sharp decline in goods exports over five months, we had a rebound in July and August. But that was not enough to make up for the ground that had been lost. We worked hard to determine the reasons for this shortfall. About half of it can be explained by weak global trade and composition changes in US demand, but the rest is unclear.” (Source: “Opening Statement before the House of Commons Standing Committee on Finance,” Bank of Canada, October 24, 2016.)
This phenomenon led the BOC to reduce the projected gross domestic product (GDP) of Canada by approximately 0.6% by the end of 2018, compared to the central bank’s July projections.
The second factor turning the BOC pessimistic towards the Canadian economy: new measures placed by the federal government to provide stability to the Canadian housing market.
Although the BOC welcomes these measures, Poloz said “We expect the government’s measures will restrain residential investment by curbing resale activity in the near term and lead to a modest change in the composition of construction toward smaller units. We estimate that this will leave the level of GDP 0.3 per cent lower at the end of 2018 than projected in July.” (Source: Ibid.)
The Bank of Canada expects the Canadian economy to grow 1.1% in 2016, and two percent in 2017 and 2018. However, it expects inflation to remain below the two-percent threshold in 2016, and inflation could be close to that level in 2017 and 2018.
Explaining the economic projections for the Canadian economy, Poloz also added, “The outlook is clouded by a number of uncertainties. These include the macroeconomic effects of the new mortgage rules, the likely path of our exports, the impacts of the federal government’s fiscal measures and the effects of the US election on business confidence. Given the two-sided nature of these uncertainties, and with the flexibility inherent in our inflation-targeting framework, we judged that the current setting for monetary policy remains appropriate.” (Source: Ibid.)
