Poloz Skirts Export Malaise With Optimism About Canadian Rebound

  • Bank of Canada Governor says ‘situation continues to be okay’
  • The bank is looking more closely at sources of export weakness

Bank of Canada Governor Stephen Poloz remains optimistic about the prospects for the country’s economy even as his export growth narrative stumbles.

Speaking to reporters in Washington on Saturday, Poloz acknowledged he’s been puzzled by the nation’s export under-performance and disappointed by the pace of the rebound, but said he believes the overall path is positive and the economy will soon get a jolt from fiscal stimulus. 

“The situation continues to be okay,” Poloz said. “We’re creating jobs, growth is low but it’s not zero, it’s moving and the U.S. economy is solid.”

Poloz has been appealing for patience for months in the face of choppy data, arguing the economy will rebound over the next couple of years on the back of a U.S. recovery. Recent communications from the Bank of Canada however have been more downbeat. Exports have “lost ground” and the balance of risks to inflation has “tilted somewhat to the downside,” the bank said in the statement accompanying its Sept. 7 rate decision.

Poloz’s comments on Saturday were his last scheduled before the Bank of Canada interest rate decision and monetary policy report on Oct. 19, and are likely to reinforce expectations that Poloz won’t cut borrowing costs even as he’s poised to downgrade his forecasts.

Swaps Trading

“The Governor’s comments suggest that he is not inclined to move rates up or down until he has a better understanding of export dynamics,” said Jean-Francois Perrault, chief economist of Bank of Nova Scotia.

Swaps trading suggests that investors are assigning a 17 percent probability of a cut by May 2017, down from about 30 percent at the end of September.

At the press conference, Poloz said the Bank of Canada is looking more closely at the causes of this year’s weakness in exports, which have resulted in slower-than-expected growth, and the central bank will have more to say about the issue on Oct. 19.

“It’s our lack of understanding frankly that causes us to say something like -- well in the September press release -- that it does look as though there is a downside risk to our profile for projecting inflation,” said Poloz, who was in Washington to attend annual meetings of the World Bank and International Monetary Fund.

Another Year

Poloz said he still believes in the “fundamental story” that the economy is adjusting to the oil price shock and companies are poised to pick up investment and hiring. The Canadian economy probably has another year of “visible adjustments” to the oil price shock, which have been masking other positive developments in the economy.

“Beneath the surface the original story is happening,” said Poloz.

Still, he acknowledged that the run of poor export data this year doesn’t “seem to fit the story.”

“We tried to track our narrative through the bumps and wiggles but then as the downside wiggle progressed five months in a row, and deep, that causes us to look more deeply into that,” he said.

Poloz cited a lull in U.S. investment which -- if long-lasting -- will have a permanent impact on Canadian exports.

Fiscal Boost

“If you could begin to be concerned that you’ve misunderstood something then this is just our way of letting you know we’re concerned,” Poloz said.

On the plus side, Poloz said he was “heartened” by the central bank’s survey of companies released Oct. 7 that showed executives are beginning to feel the worst damage from the crude oil decline may be over.

The impact of fiscal stimulus is also expected to appear soon, Poloz said.

“Policy is having its effects,” he said. “Obviously we have room to maneuver but its not a great deal of room to maneuver and fortunately we have a different mix of policy today and the fiscal effects we talked about should be showing up in the data any time now.”

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