Recent climb of loonie, oil prices adds to economic uncertainty: Bank of Canada

OTTAWA – The recent rebound in oil prices and the exchange rate is adding to uncertainty about the direction of the country’s economy, Bank of Canada governor Stephen Poloz said Tuesday.

Poloz told a business crowd in Prince Edward Island that the central bank will have to carefully monitor how companies and households react to such shifts and other financial developments over the coming months.

“Of course, I must underscore how uncertain the outlook is,” Poloz said in a speech for the Greater Charlottetown Area Chamber of Commerce.

Poloz has said his fingers are crossed that the economy — still hurting from the late-2014 oil slump — will bounce back in the second quarter after he predicted zero growth for the first three months of this year.

But the governor pointed to recent increases in both oil prices and, to a lesser degree, the Canadian dollar as sources of further uncertainty.

The price of a barrel of oil recently climbed above US$60 after dipping below US$50 as recently as March. But it’s still far below its summer of 2014 high of about US$107.

The loonie dropped Tuesday to 81.75 cents, but stayed above the 80-cent mark. It dipped close to 78 cents a couple of months ago.

Cheaper crude prices have a negative effect on Canada’s huge energy sector, which is offset somewhat by lower pump prices that help consumers.

A lower loonie boosts revenues for exporters and helps them penetrate foreign markets.

“Recent events make it clear that we live in a very uncertain world,” Poloz said.

Among those uncertainties is the performance of the United States economy, which Poloz has been counting on to provide a major boost for Canada.

So far this year, the U.S. has fallen short of expectations.

Following his speech, Poloz said he still expects the American economy to start accelerating in the second half of the year, saying, “it’s still very early days” in trying to determine what the second quarter might look like.

“The U.S. economy — slightly puzzling right now,” he said.

“It’s hard to read right now.”

Poloz blamed temporary negatives, such as poor weather, for the slow start to 2015 in the U.S. He also said American consumers appear to be hanging on to some of the savings they accumulated from lower gas prices.

BMO senior economist Benjamin Reitzes said while Poloz mentioned Tuesday that the poor performance in the U.S. is a source of uncertainty, he was surprised the governor stopped short of calling it a downside risk for Canada.

Reitzes said BMO has lowered its U.S. growth forecast for 2015 to 2.5 per cent, down from three per cent roughly just six months ago.

Data releases in the past six weeks have been “lacklustre” compared to expectations, he added.

Poloz also warned Tuesday that there’s still a risk lower oil prices could have a greater impact on the Canadian economy than expected.

The plunge in crude prices prompted the Bank of Canada to lower its trend-setting interest rate in January to 0.75 per cent from one per cent as a way to help cushion the economic blow for the oil-exporting country. The surprise change to the overnight rate blindsided markets.

“While it was clear that the oil-price shock represented a setback, it has been no simple task to figure out how far off course it’s taking us, or for how long,” he said.

Poloz, however, also pointed to the emerging positives he has seen in recent batches of economic data.

He discussed promising signs in areas such as non-energy exports, tourism and the labour market, which has seen a drop in long-term unemployment.

The governor said he hopes to see more business investment as existing companies make improvements to their operations and new firms are created. New companies, he added, tend to be more productive, more innovative and are often “prime creators” of jobs.

“The Canadian rebound hasn’t been quite as quick as we’d like, but recent data have been more encouraging,” said Poloz, who expects the economy to return to full capacity around the end of 2016.

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