Bank of Canada Governor Stephen Poloz spoke this afternoon in Iqaluit, NU. His remarks focused on international trade developments.
As is often the case in these speeches, we were given a historic overview of trade developments. Early offshoring has now given way to reshoring in Poloz’s view, as the cost of labour has become less of a deciding factor in locating global production. The result has been a reduction in the ‘intensity’ of global trade and slowing trade growth globally.
At the same time, Service exports have been rising in line with the service sector more generally. The Governor noted that Canada now sells about $120 billion per year in services to the rest of the world (about 17% of total exports), and they have been outpacing growth in goods exports. This category includes professional services, financial services, tourism, and others.
Staying with the services theme, Governor Poloz suggests that the rise of services more generally can help explain the disconnect between soft economic growth of late and still robust labour markets, noting that it can be difficult for statisticians to fully account for the impact of services in the GDP numbers.
Conversely, the Governor also reflected on the ongoing adjustments in the oil sector, and the ongoing risk of a global trade war. He noted that the developments to date have had a scarring effect on the Canadian economy.
Ultimately, the Bank still believes that things will work out, pointing to healthy domestic fundamentals and new trade agreements. Despite a global economy “performing less well than we believed only a few months ago”, and housing sector taking “longer than previously expected to digest” changes to mortgage guidelines and higher rates, the Bank continues to see both the need for the current stimulative (in their view) policy rate, and that the run of below-potential growth will be temporary.
Key Implications
This was an interesting speech, covering a lot of ground on how trade, and economies more generally, have been evolving since the global financial crisis. But, for those of us looking for hints as to their next move, it was slim pickings.
The rate-specific communication hewed closely to recent messaging. Recent headwinds are seen as temporary, if somewhat more prolonged than the Bank of Canada had previously thought. Gone were any references to future rate increases, but the current policy rate is still seen as below the ‘neutral range’. It seems we will have to wait until the next Monetary Policy Report on April 24th to see what change, if any, the Bank will have in its assessment of this range.
The press conference was a bit more exciting. Asked about the inversion of the Canadian yield curve (the yield on 10 year government debt stood at 1.70%, below the 1.75% overnight rate at time of writing), Poloz referred to it as an ‘innocent inversion’, emphasizing that he does not see a recession coming, that it is less useful as a signal in Canada, and that other indicators are not corroborating the story.
Market moves appeared to reflect the dearth of new information. Market implied odds of a rate cut fell a bit, but still price a greater than one in five chance of cut by September, and the loonie was little changed in the wake of the speech.
We agree that the current soft patch is likely to be temporary, but, while Governor Poloz was silent on changes to the outlook (their current 1.7% growth forecast for 2019 appears optimistic, even in light of January’s strong GDP figures), we don’t expect to see much above-trend growth any time soon. With growth set to shift back only to trend, there will likely be little in the way of inflationary pressures, and so little scope for a higher monetary policy interest rate. We may already be home.
