Poloz Signals He’s Looking Through Variable U.S. Labor Data

  • Canada’s export recovery ‘halting at best,’ Poloz says
  • Bank of Canada Governor makes comments Saturday in Ottawa

The U.S. economy isn’t as volatile as Friday’s employment data may appear to suggest, the head of Canada’s central bank said Saturday.

Bank of Canada Governor Stephen Poloz also said after a speech in Ottawa more than half the lost output growth from the Alberta fires could be restored in the third quarter. On the U.S., which buys three-quarters of Canada’s exports, Poloz said Friday’s data showing the slowest job growth in almost six years wasn’t a conclusive sign.

“We have had a pretty straight line in the U.S. labor market for quite some time, so I suppose it has a higher surprise value, but it’s not unusual to have that kind of variability in the data,” Poloz said. Later in his remarks to reporters he said: “The economy isn’t as volatile as the data, that much we know.”

Poloz has been on hold since cutting his key interest rate twice last year to 0.5 percent to cushion the blow from plummeting crude oil prices. The Governor’s comments Saturday pointing to an investment rebound in the second half of this year, the power of fiscal stimulus and a Federal Reserve still looking at tightening suggest he’s not planning to cut rates anytime soon, economists said.

‘Look Through’

“Everything he said just reinforced the Bank’s neutrality,” said Benjamin Reitzes, a senior economist at BMO Capital Markets in Toronto. “He said to look through volatile data.”

Canada’s dollar has weakened 4 percent against its U.S. counterpart over the last year, helping makers of automobiles and lumber, although the currency has recently rebounded, and it up almost 7 percent this year.

Poloz told the audience at the University of Ottawa he expects more signs of companies making investment in the second half. “What we are seeing, talking to companies, is that they are actually getting very close to being confident in the future, and are finding themselves at their capacity limit.”

That spending will be uneven because energy companies aren’t sharing in those gains, Poloz said. “The oil price shock is a significant setback for the Canadian economy and we said it would take a couple of years or longer, possibly three years, for that adjustment to take place,” Poloz told reporters after the speech. “That divergence in fundamentals is intact, those shocks are still working their way through the system,” he said of the reaction of the Canada and U.S. economies to cheaper oil.

‘Waiting to Judge’

“The governor is clearly waiting for the second half of the year to judge,” Nick Exarhos, an economist at CIBC World Markets in Toronto, said Sunday via e-mail. “Governor Poloz seems confident that the Fed is on course to continue tightening, a factor that will weigh on the Canadian dollar.”

Adding to the damage from lower oil prices are Alberta wildfires that knocked about 1 million barrels a day of oil production offline last month. The Bank of Canada estimated in April the economy would expand at a 1 percent annual pace in the second quarter, however policy makers said last Month damage from the wildfires may reduce second-quarter growth by 1.25 percentage points.

The Governor gave more details Saturday, saying a little more than half of the loss is from crude production and the rest is from the time it will take for people to resettle around Fort McMurray, where more than 80,000 were evacuated last month and are just starting to return.

“It’s a very difficult situation for people,” Poloz said. “I don’t want to translate that into a mechanical thing. There is a certain amount of arithmetic around, and the rest though is much more highly judgmental, when do people actually get back to work, when do they begin rebuilding.”

A disappointing trade report on Friday prompted some economists to suggest the economy could have its biggest contraction since the last 2008-2009 recession.

The Governor’s lecture focused on how policy makers can work toward finding the right mix of fiscal and monetary policy, and how they should move beyond short-term budget and inflation targets that may leave the economy vulnerable to a build-up of longer-term debt bubbles like the ones hindering growth since the 2008 financial crisis.

“The legacy effects of the financial crisis have lingered in many countries, and Canada’s export recovery has been halting at best,” Poloz said. “Accordingly, monetary policy has remained very easy in order to keep inflation near its target.”

While taking questions from the audience, Poloz reiterated his view that monetary policy has a smaller impact when interest rates are at today’s low levels, and that fiscal policy can have more of a punch.

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