Investment Missing Forecast Means Poloz Keeps Rates Low

Bank of Canada Governor Stephen Poloz will have to consider keeping interest rates low for longer because business investment won’t lead economic growth the way his predecessor Mark Carney predicted.

Poloz, who took over the country’s central bank June 3, will probably face questions about the prospects for economic expansion during testimony to the House of Commons Finance Committee at 8:45 a.m. in Ottawa tomorrow. It will be his first public comment since becoming the ninth Bank of Canada governor.

Carney forecast in April that growth in the world’s 11th-largest economy would accelerate to 2.8 percent in 2014 as the contribution from business investment doubles. That view is at odds with Statistics Canada figures showing investment stalled over the past year as well as the bank’s own survey of business spending intentions.

“They have been banging on that drum for a while now, stimulating growth and letting business lead growth, but it hasn’t materialized,” Eric Bushell, chief investment officer of CI Investments Inc., said in a phone interview. “I’m not optimistic that it will,” said Bushell, who helps oversee C$35 billion ($34 billion) for CI’s Signature Global Dividend Fund.

The Bank of Canada has pinned its expectation for growth on business spending and exports, with household spending limited by record consumer debt loads and federal and provincial governments curbing spending to eliminate deficits. Still, prices for the country’s exported commodities have stalled over the past two years according to a central bank index, leaving companies hesitant to spend and increasing the chances the central bank will keep its policy rate on hold at 1 percent into 2015.

Borrowing Costs

Carney said at every interest rate decision since April 2012 that borrowing costs could rise as the Canadian economy approaches its full capacity.

“Business investment has been largely driven by the resource sector and there have been some signs that given the softness in commodities we could see a little bit of investment spending pullback,” said Darcy Briggs, fund manager in Calgary at Franklin Templeton Investments Corp.’s Bissett Investment Management, which oversees about C$4 billion in fixed income assets. “If it isn’t as robust as they expect, monetary policy will likely remain more neutral for a longer period of time.”

The central bank cited weak global demand and the “persistent strength” of the Canadian dollar as drags on exports in a statement accompanying its May 29 policy decision. Statistics Canada said yesterday the country recorded a 16th consecutive monthly trade deficit in April, the longest stretch in at least a quarter century.

‘Highly Uncertain’

The bank’s investment forecast is “highly uncertain,” because “clouds remain over the near-term outlook for the U.S., European, and Chinese economies,” said Derek Holt, Scotiabank’s vice-president of economics in Toronto in a note to investors last week.

Poloz, 57, was chief executive officer of Export Development Canada, a government trade financing agency, before returning to the central bank where he started his career. While at EDC, Poloz echoed the view that exporters are being pressured by the dollar’s rise and must find new markets to remain competitive. “Our exporters face stiff competition from new entrants and a strong currency,” he said in an April 2012 speech in Tokyo.

The Canadian dollar was relatively stable during Carney’s more than five years as governor, weakening 4.1 percent in that time after surging 49 percent to around parity with the U.S. dollar under former Governor David Dodge. The currency gained 0.1 percent to C$1.0336 per U.S. dollar at 9:15 a.m. in Toronto. One dollar buys 96.75 U.S. cents.

No Advantage

Companies aren’t taking advantage of conditions that should encourage spending, including low borrowing costs and record levels of cash on hand. Today Statistics Canada reported that non-residential building permits fell 3.6 percent to C$2.60 billion in April, leaving them 5.9 percent lower than a year earlier.

Non-financial companies held C$600 billion of currency and deposits in the fourth quarter, up from C$434 billion in mid-2009 as the last recession ended, according to Statistics Canada. Calgary-based Suncor Energy Inc. had C$4.6 billion in cash and marketable securities in the first quarter, top among non-financial companies that have a market value of more than C$1 billion, according to data compiled by Bloomberg.

While Carney said last year companies are stockpiling “dead money” that should be invested or paid out as dividends, Poloz said in a 2011 speech that companies are building cash in response to a volatile global economy.

‘Black Swan’

“Successful companies are stress-testing their business plan with a vigor never thought necessary in the past,” Poloz told the Toronto Board of Trade in October 2011. “There are costs associated with this behavior, but they are seen as sunk costs -- they are necessary insurance against the next black swan.”

Finance Minister Jim Flaherty tried to encourage business spending in his March 22 fiscal plan through measures that would give companies incentives to train workers and buy and equipment purchases.

West Fraser Timber Co. Chief Financial Officer Larry Hughes says while his company is boosting investment on signs of a U.S. housing rebound, other companies aren’t joining him.

“Dead money, that’s not what we’re all about,” Hughes said June 3 in an interview at the company’s Vancouver headquarters. North America’s largest lumber producer is raising capital spending to boost the efficiency of its mills in the U.S. and Canada after underinvesting for several years amid the housing crisis and a multiyear slump in wood prices.

“Businesses are being very conservative right now about volatility and they don’t want to get too far ahead of things,” he said.

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