Canada is facing the shock of low oil prices and a trade war between its two biggest trading partners but Bank of Canada Governor Stephen Poloz says he doesn’t expect a recession next year.
“We're certainly not expecting a recession in 2019 but I do think that everybody needs to be prepared for volatility,” Poloz said Monday in an extensive interview with CTV News Chief Anchor and Senior Editor Lisa LaFlamme.
“We are in a volatile world and so there are risks ... but I think the Canadian economy begins this new year in a pretty good place,” he added.
Poloz said that Canada’s “fundamentals are good,” citing the lowest unemployment rate in four decades and an inflation rate that is “on target.”
“The picture’s much better than we were in say, two or three years ago,” he said.
The Bank of Canada governor, who sets Canada’s monetary policy independent of the government, said that the biggest risk to growth are the tariffs the U.S. and China are putting on each other, which could will leave their consumers with less money to buy from Canada.
“Trade and investment is already slowing internationally as a result of the trade war that’s already started and the prospects that there may be more,” he said. “That would be a slowing in all economies and higher prices because tariffs raise prices.”
“There’s a risk there that we have rising inflation at the same time as slowing economies,” Poloz went on. “There are no macroeconomic tools to fix that combination as we had in the ‘70s, the stagflation ‘70s. So that’s a bad prospect.”
North American stock indexes have fallen dramatically in recent weeks. On Monday, the S&P/TSX composite index lost 232.42 points and closed at 14,362.65, the lowest level since September 2016.
The jittery markets are evidence of investors “wrestling with the prospect of a trade war between the United States and China and frankly other countries,” Poloz said.
But as bad as a prolonged trade war between the U.S. and China would be, Poloz points out that many people thought NAFTA would be torn up by the United States yet the Trump administration agreed to a deal with Canada and Mexico.
“And I think the same thing is true on the U.S.-China front,” Poloz told LaFlamme. “Right now everybody is talking about the gloom scenario, but we've seen signs of optimism in recent weeks that they are making progress behind the scenes, and if they do resolve all of that, well, that'll be a source of brand new lift to the global economy, and I think then we can see this expansion continue on for quite some time.”
Another source of volatility, Poloz admits, is U.S. President Donald Trump’s attempts to pressure the U.S. Federal Reserve using his Twitter account.
Poloz says the president’s tweets have “become part of the noise that we see every day.”
“It's sort of noise though (that) one never gets used to, I’ll confess,” he added. “I mean it just adds to the uncertainty that's floating around.”
Poloz acknowledged that low oil prices are also a risk to the Canadian economy, but said he doesn’t believe the current economic crisis in Alberta is as bad as the shock that low oil prices caused there in 2014 and 2015.
“When the prices fall from $150 to $50 dollars and then to $30 dollars in 2014-15, that was a huge shock for the economy, and two to three years later, macroeconomically speaking (Alberta is) back on track,” he told LaFlamme.
Another reason for relative optimism are the changes in capital consumption allowances announced in the November fiscal update. Businesses can now immediately expense the cost of some machinery and equipment for tax purposes.
“That'll be an important engine for growth as we go into 2019,” Poloz said.
The governor wouldn’t say whether the benchmark interest rate will rise from 1.75 per cent in January but he did offer advice for consumers looking to make big purchases in the coming weeks.
“They need to consider their overall situation as always,” he said. “And certainly with taking on a mortgage these days, what we've asked is that everyone test themselves against a two percentage point increase in interest rates so that they know they'll being able to handle higher payments when they do renew their mortgage.”
“They don't have to go to a bank to figure that out and make sure that they can they can be able to absorb those kinds of changes,” he said.
