Why the Bank of Canada won't fight a recession till there is one!
03 Sep 2019
Inevitably, Bank of Canada governor Stephen Poloz must do his job in the shadow of his powerful U.S. equivalent at the Federal Reserve.
But as Canada's central banker reveals his rate decision on Wednesday, he will have an edge on Fed chair Jerome Powell. The Poloz advantage is that Prime Minister Justin Trudeau won't be hollering at him to cut interest rates or insulting him when he doesn't.
With so much fearful talk of a coming recession, U.S. President Donald Trump is not the only one who has called for rate cuts to boost the economy.
But as the fundamental strength of Canadian growth, employment, income and housing seems an oasis in a world beset by recessionary fears, Poloz and his advisers will do what good central bankers like best: follow the data.
Whatever may be around the corner, it is hard to dispute that right now the fundamentals of the Canadian economy are strong. Annualized gross domestic product numbers on Friday hit nearly four per cent, well above forecasts, although the year-over-year gain is less than half that.
Jobs, wages and inflation remain strong. Housing is no longer soaring, which is good, but it is no longer plunging either. Canadian shoppers are still shopping.
Seeking hints
It is almost certain that the Bank of Canada will leave rates unchanged tomorrow at 1.75 per cent.
This is not one of the times when Poloz and his deputy Carolyn Wilkins explain their thinking to the business media. Nonetheless, market watchers will be going over their written statement with a fine-tooth comb for hints of whether there will be rate cuts before the end of the year.
A poll of 40 economists by Reuters now shows a majority foresee no rate cuts in 2019. But it's a split decision. Just over 40 per cent say not only will there be a cut, but some suggest it will be half a percentage point, double the usual quarter-point decrement.
"With the Fed likely easing in September and then again in October, it looks as if it would be the prudent thing to do for the Bank of Canada to take up some insurance as well," BMO's Benjamin Reitzes told the news agency.
U.S. easing is not yet certain. Warnings of price increases by retailers due to the China-U.S. trade war may push inflation higher. A partial resolution of the trade fight may make two cuts unnecessary.
Poloz may indeed find himself pressured by U.S. and other countries' rate cuts if he believes there will be an impact on Canada. But the idea that central banks can do much to compensate for an economy smacked by the growing costs of trade disputes, especially by cutting interest rates in advance, was a subject of debate at the recent central bankers' conference at Jackson Hole, Wyo.
With rates already so low, it is not clear even a half-point cut would convince business borrowers to take out additional loans to expand their businesses just when they have been warned a recession is about to strike.
And rather than boosting business fundamentals, rate cuts when an economy is running hot would mostly jack up asset prices like real estate and stocks, which might please speculators, but would only make a bigger noise should a recession bring those asset prices crashing down.
The wrong message
Another documented effect is that when people see them battening down the hatches for a coming storm, central bankers are viewed as having privileged information about the economy and its future, and research shows businesses and consumers tend to take it as a signal to cut spending, slowing the economy.
While there will be plenty of criticism and suggestions for improvement during the upcoming election campaign, there are signs that Canada is benefiting from years of relatively good government by Trudeau and Stephen Harper before him.
Immigration and high levels of education have given Canada a healthy workforce. Recent data shows that while Canada's rich are not as rich as their U.S. counterparts, those earning median salaries and below are significantly better off.
"Our income estimates may actually underestimate the economic well-being of Canadians relative to Americans," writes Bloomberg's Justin Fox. "Indeed, Canadians usually receive more in-kind benefits from their governments, including notably in health care."
As previously reported, research from C.D. Howe's Farah Omran shows that stronger incomes at the lower end of the wage spectrum result in more spending, recirculating money in the active economy rather than transferring it into inactive savings.
Of course, that economic advantage Fox reports only comes after you look at Canadian purchasing power parity. Canadian dollars buy more goods and services here at home, but as we discovered during a summer visit to Alaska, they don't go so far in the U.S.
Last week The Atlantic reported that a coming recession was going to doom U.S. young peopleweighed down by student debt and poor job prospects. But as Bloomberg's Fox observed, the mood really is different in Canada.
While Canadian youth also face the burden of high rents and entry-level wages, subsidized education means levels of student debt are not as extreme. And with boomers departing the workforce in droves, young Canadians know there are hundreds of thousands of good jobs going begging if only they can get the right credentials.
