Canada’s Macklem Curbs Growth Forecast on Elusive Exports

Bank of Canada Senior Deputy Governor Tiff Macklem said the nation’s economy will expand more slowly this year than the central bank forecast as stronger exports and business investment remain elusive.

Growth in the third and fourth quarters is expected to range between 2 percent to 2.5 percent, below the Bank of Canada’s July forecasts of 3.8 percent and 2.5 percent for the two periods, Macklem said in a speech to the Economic Club of Canada in Toronto.

“We need a rotation in demand toward exports and business investment,” Macklem said. “Unfortunately, this rotation has proven elusive.”

After an initial burst following the recession, Canada’s economy began to slow last year amid weak global demand for its goods and a slump in business capital spending. Until today, the central bank had predicted a recovery in exports would help fuel a rebound starting in the second half of this year, which would eliminate slack in the nation’s economy by 2015 and lead to higher policy interest rates.

Investors are betting Governor Stephen Poloz will extend a three-year pause, the longest since the 1950s, by keeping his 1 percent benchmark interest rate unchanged until at least the end of next year.

“Monetary policy remains highly stimulative to provide time for the recovery in exports and investment to take hold,” Macklem said today.

Dollar Weakens

The Canadian dollar extended declines following release of the speech, dropping as far as 0.3 percent to C$1.0337 per U.S. dollar. It traded at 1.0328 per U.S. dollar at 1:21 p.m. in Toronto. One Canadian dollar buys 96.82 U.S. cents.

Macklem declined to forecast the exchange rate during a question-and-answer session after the speech, saying policy makers have monitored its appreciation in recent years, which was triggered by a relatively robust economy and by foreign investors buying Canadian securities.

“Clearly Canada is in a privileged global position -- strong fiscal policy, sound monetary framework, we have abundant commodities,” he said.

“We have from time to time seen capital flows and there’s no doubt that they also tend to boost” the currency, Macklem said. “From a monetary policy perspective, we certainly have been taking into account where the exchange rate is, and that’s an important reason why monetary conditions in this country have remained highly stimulative.”

Revised Projections

The bank’s revised projections come after Statistics Canada reported Aug. 30 second-quarter growth at a 1.7 percent annualized pace, above the 1 percent the central bank had forecast. Today’s update brings the bank more in line with forecasts by private-sector economists, who are predicting a 2.1 growth rate this quarter, and an average of 2.4 percent over the next six quarters, according to Bloomberg surveys.

Macklem’s speech didn’t refer to the economy nearing a “tipping point,” which was the major theme of a Sept. 18 speech by Poloz in Vancouver. Poloz said the Bank of Canada was projecting a “solid pace” of export growth that will lead to a “broadly based” increase in investment and provide incentives for new businesses to form.

Growth is expected to accelerate in 2014 as demand for exports and investment spending gain momentum, Macklem said, while cautioning that “there is a risk that this rotation is delayed further.”

With potential output growth estimated to be about 2 percent, the nation’s economy needs to expand by at least 2.5 percent in order to begin absorbing the “current material degree” of slack, Macklem said.

Slower Growth

Canada has averaged annualized quarterly growth rates of 1.3 percent since the start of 2012, down from 3 percent in 2010 and 2011, according to Statistics Canada data.

Because the central bank anticipates household and government spending together to contribute about 1.5 percentage points of growth, net exports and business investment will need to add at least 1 percentage point to the nation’s expansion, he said.

“That means together exports and investment need to grow by at least about 4 percent after taking into account their import content,” Macklem said. “In the past year, next exports and investment made no contribution to growth.”

Stronger exports will bolster confidence and foster new capacity-building investment, reversing a trend of low capital spending, Macklem said.

Investment Pick-up

“Investment is unlikely to accelerate until businesses are confident that demand is picking up,” Macklem said in the speech, which also outlined the global economic outlook.

Macklem said the recovery in U.S. private demand is helping to bolster exports of lumber and building supplies, that Japan’s policies to stimulate its economy are producing “impressive results,” and that there are “early signs of recovery” in Europe.

While China is still experiencing “solid” growth, other emerging markets are experiencing “increased financial volatility and weakening growth prospects” that could exert “downward pressure” on commodity prices, he said.

“In aggregate, commodity prices are expected to remain relatively stable through 2015, with the effects of modest expected declines in oil prices offset by a gradual rise in the prices of non-energy commodities,” Macklem said.

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