Canada's economy bouncing back after summer bump: BoC
Published Wednesday, October 24, 2012 11:49AM EDT
Last Updated Wednesday, October 24, 2012 1:51PM EDT
OTTAWA -- Bank of Canada governor Mark Carney says he is not as eager to raise interest rates as he was a few months ago, although he made clear the next move will likely be to increase rather than reduce the cost of borrowing.
The central banker made the statement Wednesday following release of the latest quarterly economic outlook and amid some confusion about Tuesday's changes to the guidance that bank issues during policy announcements.
As expected, the bank kept its policy rate at one per cent for the 17th time, but changed the language on its tightening bias to read that "over time" historically low interest rates will need to rise.
"The case for adjustment has become less imminent," Carney explained Wednesday. But noting that the economy continues to expand and the high levels of household debt, "Over time rates are more likely to go up than not."
He also asserted that despite inserting concerns about debt as a factor in setting monetary policy, it remains "the last line of defence" and that the federal government has better tools to address the problem.
"Because of global headwinds, there is a need to provide very stimulative monetary policy to encourage business investment and to encourage household borrowing," he said.
"One of the consequences, is this ... risk around household debt and the first best response is to use other instruments."
Most private sector economists don't believe Carney will take any action on rates until late 2013 or early 2014.
Overall, Carney said he is slightly more optimistic than a few months ago about developments around the world, and some aspects of Canada's economy as well.
The housing market appears to be moderating, and so is credit growth among households, although due to lagging factors, debt to income is expected to keep rising from the current record 161 per cent before levelling off in 2014.
But the most significant change may be in the risks to the global economy, following aggressive actions by policy-makers in Europe and in the U.S., where the Federal Reserve introduced a third round of quantitative easing. As well, China is showing signs of arresting its growth slide and the U.S. housing market is picking up.
"Lump all of that together, the (developments) have reduced global risk and our outlook for foreign activity is quite strong," Carney said.
In the report issued earlier in the morning, the Bank of Canada said growth in the country is rebounding -- if moderately -- after hitting a sizable speed bump in the recently completed third quarter.
The bank estimates that Canada had its worst quarter in the recently completed July-September period since the spring of 2011, advancing only one per cent, or half the rate the bank had expected.
The main cause, the bank said, was temporary production shutdowns in the oilpatch during the summer.
But the latest outlook from the central bank predicts activity will pick up globally and in the U.S., giving Canadian exporters a boost and helping the economy bounce back to 2.5 per cent growth in the last three months of the year, followed by 2.6 per cent gains in each of the following three quarters.
"The bank expects growth in the Canadian economy to pick up in the coming quarters to a somewhat faster pace than that of its production potential," it said.
"The pick-up in growth from its trough in the third quarter of this year is expected to be driven primarily by a modest increase in net exports. This balances ongoing competitiveness challenges (high dollar) with the projected improvement in the growth of foreign activity."
On an annual basis, the bank says growth will average 2.2 per cent this year, 2.3 in 2013 and 2.4 in 2014.
However, the economy is still operating below capacity and won't be firing on all cylinders until the end of next year, it added.
Wednesday's adjustments in growth are mostly tweaks from the bank's previous projections in July, driven by historic revisions in the way the numbers are calculated by Statistics Canada earlier this month. But the overall message of the latest analysis comes off rosier in the margins than the bank's review in July.
Globally, the bank has kept its modest expectations for growth intact, but it has upgraded U.S. growth somewhat to 2.1 per cent this year rising to 3.2 in 2014. The main reason is the Fed action the bank judges will likely boost growth by 1.3 percentage points in the U.S. in 2014. A stronger U.S. economy also lifts the Canadian boat, the bank said, by about 0.4 percentage points in the same year.
Although the bank expects exports to pick up gradually, the main drivers of the Canadian economy remain consumer consumption and business investment. The public sector has practically abandoned the field in terms of a growth generator as governments move to restraint, it said, resulting in a modest drag this year and equally modest stimulus next.
The bank also expects housing activity to continue to slow, but does not anticipate a crash, noting that despite "signs of overbuilding, the level of housing investment still remains near historical highs." That's especially true in the condo market, it said.
The bank still sees considerable risks to its base case scenario of a gradual improvement in the economy, particularly failure among policy-makers in Europe to control their debt crisis and in the U.S. to avoid a fiscal cliff at the end of this year that could sap four percentage points from growth.
And of course, it sees high Canadian household debt and a correction in housing as a vulnerability.
But it also notes that conditions may become stronger than predicted as well, including a stronger global recovery that provides a bigger bang to Canadian exports.