The Bank of Canada is ready to accept pain today for growth tomorrow

Poloz and co. were always clear: the Bank of Canada wanted export growth. That’s happening—but it’s not without growing pains

 
Bank of Canada building
(Patrick Doyle/Bloomberg/Getty)

It’s been a rough decade for economic forecasters. Few saw the financial crisis coming and fewer still predicted it would take forever to recover from it. Expert opinion has suffered as a result. But the Bank of Canada seems to be getting a handle on things, at least over the past year or so.

Governor Stephen Poloz scored a rare win over the cynics in 2015, as his shock interest-rate cut a little over a year proved to be entirely appropriate. He would approve another quarter-point reduction midyear; again, difficult to say he made a mistake considering what followed. There still is some debate over what to call the affliction that Canada suffered last year. (Mild recession? Stagnation?) But there is little denying that the Bank of Canada was ahead of the curve. Poloz lauded the work of his forecasting department on numerous occasions, suggesting he is pleased with the way they tweaked their models to reflect contemporary economic conditions. That’s significant, considering he spent the early part of his mandate telling the public that economists’ preferred methods for telling the future no longer worked.

It is reasonable to bet that Poloz was never tempted by disco because he has proven himself to be impervious to fads. He has been remarkably faithful to the economic theory he learned in university. Remember the “new normal” of slow global economic growth? One of the men who takes credit for the phrase now wants to call what is happening something else. Nouriel Roubini, an economist who became semi-famous for predicting that bad things were coming before they arrived in 2008, now says we are living through the “new abnormal.” The International Monetary Fund’s variation on this theme was the “new mediocre.” Through all of this silly labeling, Poloz simply has counseled patience, saying the combination of a weaker currency, low borrowing costs and sounder global demand would stir Canada’s economy back to life.

The latest data make Poloz’s point. Key to the Bank of Canada’s forecast is a revival of non-energy exports. There is nothing Canada can do about the price of oil, the collapse of which in 2015 caused the overall value of Canada’s exports to decline 0.9% from 2014. But a jump in international shipments of stuff other than energy softened the blow. Non-energy exports jumped 4.5% in December from the previous month; on the year, they were 3.4% higher. This sort of momentum could keep the central bank from cutting interest rates again, provided the slump in commodity prices bottoms and the government’s planned infrastructure program triggers a rebound in business spending.

Another part of Poloz’s message is that the provinces that generate those non-energy exports eventually will make up for the heavy losses of employment and wealth in the places that do. As economists at National Bank of Canada showed last week, that is happening too:

Chart showing full-time employment across four Canadian provinces

None of this argues for complacency. Canada’s unemployment rate rose to 7.2% last year from 6.6% in 2014. Even with resurgent exports of automobile parts, financial services and the like, Canada’s economy only will grow 1.4% this year, according to the Bank of Canada’s latest forecast. That’s not fast enough to generate new jobs for all those former oil workers. Unfortunately, given the Bank of Canada’s forecasting record of late, we have to assume that’s as good as it gets without a shift in circumstances.


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