Earlier today, in his first speech of the year, Bank of Canada (BoC) Governor Stephen Poloz underscored his continuing dovishness toward future rate hikes with a somewhat downbeat assessment of global growth prospects.
In his remarks before the Halifax Chamber of Commerce, Mr. Poloz noted that despite the fact that a recovery has been underway since 2009, economic growth still pales in comparison to the years prior to the Great Recession. In a similar manner, global growth has been occurring at a pace that's just two-thirds of what prevailed during the several-year period leading up to the downturn.
Despite the gloomy tone, the implications of his remarks are positive from a policymaking standpoint, as they signal the BoC is in no hurry to raise rates, a move that could choke off the country's sluggish growth.
The timing of this speech was important, as it came in the wake of the Reserve Bank of New Zealand's (RBNZ) decision to raise its short-term cash rate to 2.75 percent, up 25 basis points from its all-time low. This was the RBNZ's first rate hike since July 2010, and it's one of the first developed-world central banks to embark upon a tightening cycle since the Global Financial Crisis.
Though tiny New Zealand is on the other side of the globe, it's considered one of Canada's developed-world peers, part of the so-called commodity bloc. And given Canada's recent uptick in inflation along with stronger-than-expected economic data, Mr. Poloz needed to quell any speculation that the BoC might follow the RBNZ's lead.
Although the economies of both Canada and New Zealand are forecast to expand over the next two years, New Zealand's growth trajectory is much stronger than Canada's. While Canada's gross domestic product (GDP) is expected to grow by 2.3 percent and 2.6 percent in 2014 and 2015, respectively, New Zealand's economy is projected to grow by 3.0 percent and 3! .5 percent, respectively, for those years.
In other words, Canada needs more of a push, not just from internal policymaking, but also from a US rebound that finally seems to be gaining traction. A rate hike at this juncture would jeopardize the BoC's hopes for the export sector to take over from debt-burdened consumers as the primary driver of the country's economy.
Fortunately, it seems like traders got the message. Following the speech, the Canadian dollar tumbled slightly more than 1 percent from the day's high and is fast approaching the loonie's four-year low, near USD0.891, which the currency hit in late January. The loonie currently trades near USD0.898, down about 15.3 percent from this cycle's high in mid-2011.
Beyond signaling the BoC's rate bias, Mr. Poloz offered additional analysis as to why boosting growth has proved so difficult. First, he acknowledged both the extraordinary nature of the downturn, the recovery from which the BoC has previously said was more akin to a period of post-war reconstruction than the usual rebound that follows a recession. He also noted that the several years of growth that preceded the downturn were similarly extraordinary, and that therefore it may not make sense to extrapolate the heady growth rates from that era into our expectations for future growth.
Mr. Poloz then turned to the underlying factors that drive an economy: productivity and the labor force. The good news is that the country's productivity growth over the next two years is expected to outpace its average over the past 30 years.
The bad news is that demographics may pose a considerable long-term challenge for sustaining a robust labor force, particularly as the baby-boom generation retires, and consequently the country's work force shrinks. Additionally, the bank also foresees problems arising from how baby boomers, which constitute the single largest cohort of Canada's population, store their wealth. Naturally, because interest rates are at histor! ic lows, ! a considerable portion of boomer wealth has been invested in real estate.
While housing is an important sector of the economy, Mr. Poloz, like other economists, believes that when assets are tied up in real estate, they're not being put to their most productive end and are therefore holding back economic growth.
Although demographics is destiny, as the saying goes, Mr. Poloz believes that trend could still be offset by countries working together to remove impediments to growth, such as by removing trade barriers.
Just last week, we wrote about how Canada's government is already aggressively pushing toward that end, with its hard-won free-trade agreement with South Korea an important step toward diversifying the country's export markets.
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