OTTAWA — Canada’s economy is still in for a choppy ride, even as the climate appears to be improving here and elsewhere.
But the Bank of Canada on Wednesday clouded that outlook, saying its view “balances the many upside and downside risks to inflation” and that will keep interest rates near record lows for some time to come.
[np_storybar title=”Top 4 risks facing Canada’s economy, according to the Bank of Canada” link=”http://business.financialpost.com/2013/07/17/bank-of-canada-economy-risks/”%5DWhile the Bank sees some hope for a pick-up in Canadian growth later this year, risks remain. See the list[/np_storybar]
For Stephen Poloz, who took over as central bank governor in June, Wednesday’s decision to again leave the BoC’s key borrowing rate at 1% — where it has been since September 2010 — was the first opportunity to directly influence monetary policy.
It was also the first chance for Mr. Poloz, 57, to provide input to the bank’s quarterly Monetary Policy Report — a look at economic conditions and possible threats to growth forecasts, and a document that he helped launch at the BoC before leaving to later head Economic Development Canada, the Ottawa-based export credit agency.
In Wednesday’s report, the bank said Canada’s economy is “expected to be choppy in the near term.” It forecast growth of 1.8% this year, up from an estimate of 1.5% in its April report. But for the second quarter this year alone, the bank is forecasting slower growth of about 1% reflecting the impact of the flooding on Alberta and province-wide construction strike in Quebec.
That growth could be threatened by the “failure to contain the crisis in Europe, and weaker growth in China and other emerging-markets economies,” the bank said.
“The most important domestic source of risk to the Canadian economy remains the possibility of a disorderly unwinding of household sector imbalances.”
Growth in the U.S., meanwhile, is expected to remain moderate at 1.7% this year, slightly weaker than the bank’s forecast of 2% in April. The economy will likely accelerate to 3.1% in 2014 — unchanged from the earlier forecasts — “with the continued strengthening in private demand being partly offset by the impact of fiscal consolidation.”
Globally, expansion remains modest, “although the pace of economic activity varies significantly across the major economies,” the bank said. In particular, growth in Japan has strengthened, while China as slowed and the eurozone remains in negative territory.
Still, overall, the world economy is estimated to expand by 2.8% this year — down from the bank’s April forecast of 3.2% — and grow 3.5% in 2014, compared to the previous call of 3.6%.
As expected, there was little change to the wording of the statement accompanying Wednesday’s rate decision — although, in contrast to previous references, there was no mention of any negative impact of Canadian dollar’s “persistent strength,” given the currency’s recent weakness.
Also not surprising, given Mr. Poloz’s previous role at the EDC, the statement emphasized an anticipated pickup in trade activity and corporate spending, thanks in large part to the stronger U.S. economy.
“Despite ongoing competitiveness challenges, exports are projected to gather momentum, which should boost confidence and lead to increasingly solid growth in business investment,” the report said.
“The economy will also be supported by continued growth in consumer spending, while further modest declines in residential investments are expected.”
Policymakers reiterated their forecast from the April MPR that the pace of economic growth should be sufficient to gradually eliminate excess capacity by mid-2015, with inflation reaching the bank’s 2% target around the same time.
The bank stuck to its forward guidance, with some minor rewording, despite calls from some economists to drop its pro-rate-increase bias in favour of a more neutral stance.
“Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target.”