Even Brexit Can’t Shake Poloz’s Faith in Canada's Export Story

  • Bank of Canada keeps benchmark interest rate unchanged at 0.5%
  • Policy makers cut forecasts for 2016 and 2017 GDP growth

Bank of Canada Governor Stephen Poloz is keeping his faith in an export-led recovery, shrugging off recent setbacks such as Brexit and weaker U.S. demand.

Poloz held his benchmark interest rate at 0.5 percent in a rate decision that argued fundamentals remain in place for faster growth. The impact of the U.K. vote to leave the European Union will be modest, knocking 0.1 percent off Canadian gross domestic product over the next two years, while a disappointing export performance was partly due to a temporary decline in U.S. investment, the bank said Wednesday in Ottawa.

Canada’s central-bank chief has been steadfast for years in his belief a recovering U.S. economy will eventually fuel export sales, trigger new investment and lift the nation’s economy, even in the face of what Poloz calls “serial disappointment.” Some economists are beginning to question whether that faith is misplaced.

“They are being too optimistic on the trade part,” Mark Chandler, head of fixed income research at RBC Capital Markets, said in a telephone interview. The weakness “has persisted so long and been so widespread it’s tough to have faith it’s going to come back.”

Recovery Scenario

The bank has built its recovery scenario around the “sequence” of stronger non-commodity exports boosting business spending and job opportunities. That sequence is “progressing, albeit unevenly,” the bank said. The upward trend in non-resource shipments will continue, with policy makers highlighting that they will exceed the pre-recession peak next year.

It’s been an article of faith that’s been recently tested by the data. Since reaching a record in January, total exports are down 10 percent -- and the drop wasn’t confined to the oil patch, with non-energy exports down about the same amount.

“Their upbeat tone on exports is a bit surprising,” given the pace of shipments so far has been modest, Benjamin Reitzes, senior economist at Bank of Montreal’s BMO Capital Markets unit in Toronto, said by phone. “It will take more to get him to move, that’s the message here.”

Poloz said Wednesday he’s focusing on more encouraging longer-term export trends.

“The export recovery is alive and well,” the central banker told reporters. “You kind of have this narrative that nothing’s happened and yet what we see is actually seven or eight years of recovery, a slow recovery for sure, but one that’s been steady and is now pretty well done.”

Full Output

To be sure, the central bank acknowledged its last forecast was on the optimistic side. 

The economy will return to full output “towards the end of 2017,” policy makers said, a little later than the April prediction for the second half of next year. Growth this year will 1.3 percent, down from the previous forecast of 1.7 percent, with the contribution from exports dropping to 0.3 percentage point from 1.1 points, the bank said. Still, exports will rebound in 2017 and will account for half of the projected 2.2 percent expansion next year.

The Bank of Canada said Brexit “triggered a sharp but orderly re-pricing of a number of asset classes,” and will reduce global output by 0.2 percent, and 0.1 percent in Canada, by the end of 2018. Fortunately for Canada, the country’s exposure to Europe is small compared with the the U.S., where growth has been more robust.

Wednesday’s decision comes the day before Poloz’s predecessor Mark Carney is expected to lower the Bank of England’s policy rate. Carney, who led the Bank of Canada from 2008 to 2013, has warned that leaving the EU could trigger a recession.

U.S. Growth

Canada’s dollar strengthened 0.6 percent to C$1.2967 per U.S. dollar at 12:16 p.m. in Toronto. Government bond prices rose, with the yield on debt due in 10 years declining to 1.02 percent from 1.06 percent. All 25 economists in a Bloomberg survey predicted Poloz would stay on the sidelines this week.

The U.S., which buys three-quarters of Canada’s exports, will grow about 2 percent through 2018 on a strong labor market and monetary stimulus, the bank forecast Wednesday.

Energy investment will stabilize by year-end after a 60 percent drop, which came after crude oil prices plummeted. That will allow the expansion of other industries to become “the dominant trend in the second half of 2016,” the bank said in its Monetary Policy Report.

Another consideration for the central bank may be that lower rates would potentially stoke further gains in Vancouver and Toronto housing markets, where prices have surged 32 percent and 17 percent over the past year, respectively.

The central bank has concerns “about household indebtedness and housing, particularly in the Greater Vancouver and Toronto markets,” Senior Deputy Governor Carolyn Wilkins said in the opening statement to Wednesday’s press conference.

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