Many conditions are in place for “natural” economic growth to return to Canada, Stephen Poloz said at a September 18 Vancouver Board of Trade event.
In his first speech in Western Canada since taking over as governor of the Bank of Canada (BOC) in June, Poloz pointed out that balance sheets of corporate Canada are healthy, the cost of capital remains low and credit “appears to be accessible.”
But he said what has been missing is business confidence. As late as this summer, Poloz noted that companies told the BOC through its quarterly business outlook survey that uncertainty about the nature and timing of improving growth prospects were weighing on their investment decisions.
However, he noted that various private surveys of business sentiment show some improvement and said that confidence levels, bolstered by a decline in financial market uncertainty, appear to be shifting.
“Evidence suggests we are now close to the tipping point from improving confidence into expanding capacity.”
While it’s difficult to predict when business confidence improvement solidifies, when it does, the economy should start seeing rapid improvement.
“Given what firms have been through, it naturally would take a lot of confidence to expand. However, once there is a shift in sentiment, research shows that business decision-makers tend to react and move forward very quickly,” said Poloz. “Some new data suggest we may be turning a corner.”
Poloz’s speech came on the same day as the US Federal Reserve surprised the market by continuing its “quantitative easing” policy that involves monthly purchases of $45 billion in U.S. Treasury bonds and $40 billion in mortgage-backed securities. Most analysts had expected the Fed to begin “tapering” its purchases, while keeping its benchmark interest rate between 0% and 0.25%.
But Poloz noted in his press conference after the VBOT speech that the Fed’s tapering should not be seen in a vacuum.
“When the Fed begins to taper, it will be from growing confidence in the U.S. economic outlook, and that will be growing confidence where we [in Canada] will be benefiting from. It’s consistent with the gradual normalization of the U.S. economy, which we are all looking forward to.”
He expects Canada to benefit from continued improvement in the U.S. economy, particularly for machinery and equipment and wood product exporters.
And while concerns persist over China’s slowing economy, Poloz said the growth should be viewed in context with the rest of the global economy.
He noted the Chinese economy had a “puffed-up growth profile” prior to the 2008 recession because it was based on “extraordinarily strong” spending growth in the U.S. and other key markets. With the U.S. economy now on a more “normal” growth path, it shouldn’t have been a surprise to see China’s growth slowing. He noted Canada will continue to benefit from emerging markets like China as it diversifies beyond the U.S. “Today, China’s growth of 7% give or take is not much different in terms of increased demand every day from the world. It’s an economy that’s getting bigger everyday and demands from the rest of the world keep getting larger. Even if the growth rate is lower, the increments are still very large.” •
