While the Canadian economy is enjoying a “magic moment” in terms of economic performance compared to its G-7 partners, don’t look to the Bank of Canada to provide any additional fiscal stimulus, advises a top economic analyst.
Given global economic conditions, “it’s a bit of a no-brainer that interest rates are going to stay fairly low,” Scotiabank’s senior vice-president and chief economist Warren Jestin told a joint meeting of the Economics Society of Calgary and the Treasury Management Association of Canada (Calgary branch) last week.
Jestin’s views were confirmed by Bank of Canada governor David Dodge, who, while in Calgary last week, announced interest rates are unlikely to rise until next spring at the earliest.
During his luncheon speech, Jestin outlined Scotiabank’s most recent global economic outlook. Exceptionally volatile financial markets and declining equity prices haven’t completely derailed the global economy, he said, and while Canada stands to post stronger domestic growth next year than the U.S., it still remains in the shadow of the giant.
“European or Asian investors are looking at us as a fairly ill-equipped, occasionally interesting market that is largely an adjunct to the U.S.,” explained Jestin.
“There is a skepticism out there, even with these very strong fundamentals . . . it’s the U.S. story that’s the important one. As long as the U.S. has a lock on safety, security and liquidity, and as long as their equity markets tend to do better than the European market, overall the investments will continue to flow there.”
The bottom line, he added, is that the U.S. dollar isn’t going to weaken any time soon, so it isn’t likely the Canadian dollar will recover any significant ground. And while U.S. politicians may talk tax cuts in the face of their twin deficits, there’s less potential for such fiscal stimulation in Canada.
“You can’t say the word deficit in this country and get away with it,” said Jestin. “We’ve convinced Canadians so well that it’s an evil word, that we’ll be staying at a surplus even if we have to inflict a fair bit of discomfort on the economy.”
Reversing the trend of declining business investments, which is constraining the pace of global economy recovery, is another ongoing challenge, he said.
Businesses are dealing with a cost crunch – trying to figure out how to maintain or improve profitability with no reasonable expectation of passing on prices – and are faced with either cutting employment rolls, investment or both. “Business investment will continue to be a lagging area, both in Canada and abroad in terms of performance,” Jestin added.
Canada continues to boast the strongest economy and trade surplus among G7 nations combined with continued robust employment growth by historical standards and low inflation, he noted.
“All of these things suggest that governor Dodge is not going to be quick on the trigger to lower interest rates, but at the same time, statements coming out of the Bank of Canada suggest they’re in no hurry to raise the rates, either.”
While in Calgary, Dodge also talked about efforts to restore consumer confidence in the wake of recent corporate governance and accounting scandals. The Bank of Canada is launching a new semi-annual publication next month called the Financial System Review to help promote public awareness and discussion of Canada’s financial system.
Meanwhile, the Organization for Economic Co-operation and Development (OECD) released a report late last week saying Canada was maintaining the momentum of its economic recovery.
The OECD, the world’s largest economic analysis and forecasting agency, predicts gross domestic product growth at 3.1 per cent next year compared with 3.3 per cent this year.
“With the economy already close to full capacity and core inflation near the top of the target range, a gradual but steady monetary tightening will be required to keep prices under control,” the OECD said in a statement from Paris.
