Threats to the global recovery have increased, the Bank of Canada said Tuesday, causing headaches for exporters and boosting the chances that Governor Mark Carney will keep borrowing costs steady through the middle of next year.
Mr. Carney, who left his benchmark interest rate at 1 per cent Tuesday for the second time since a string of three increases this summer, has said for months that he's counting on sales abroad to propel the rebound as consumers retrench and the jolt from housing-related incentives and billions in government stimulus money fades to black.
It now seems clear it will take longer than anticipated before demand from the United States and the rest of the world picks up enough for that to happen.
Sovereign-debt problems in several European countries "could trigger renewed strains" in global markets, the central bank warned Tuesday, adding another layer of uncertainty for exporters, on top of persistent worries that private demand in the United States is "picking up slowly" and growth in emerging markets has started to cool to a more sustainable pace.
"World growth has weakened recently - not just in the developed world, but also in key emerging markets," Peter Hall, vice-president and chief economist at Export Development Canada, the government's export-financing arm, said in an interview. "We expect exports to grow next year, but at just half the pace of this year, and that slowing will affect most industries." The central bank reiterated Tuesday that further hikes would have to be "carefully considered," and while the decision was expected by investors, some economists said the slightly more pessimistic tone of the accompanying statement means Mr. Carney will hold his fire until July or later.
Canada's economic performance has been even weaker than the underwhelming pace of growth Mr. Carney anticipated in a forecast he released in October. The central banker has long warned that the U.S. recovery would be grinding, and while expansion in developing nations like China has slowed, it is still eye-popping compared with much weaker rates in the advanced world. However, Mr. Carney noted Tuesday, exports have been disappointing in recent months, exerting "a significant drag on growth." Third-quarter gross domestic product data released last week by Statistics Canada showed that the sales abroad that will be so crucial in the months ahead remain an Achilles heel, holding the economy to its worst performance in a year. In September, the economy contracted, indicating little if any momentum going into the final three months of the year.
"Economic activity in the second half of 2010 appears slightly weaker than the bank projected" in October, the central bank said Tuesday. "A combination of disappointing productivity performance and persistent strength in the Canadian dollar could dampen the expected recovery of net exports."
Mr. Carney's latest decision actually coincided with some encouraging news from abroad. American stocks were buoyed after U.S. President Barack Obama and Republican leaders in Congress reached a deal to extend George W. Bush's tax cuts for two years, providing a glimmer of hope that Washington and the U.S. economy aren't as paralyzed by gridlock as some feared. And in Europe, Ireland's parliament approved an austerity budget needed to secure a massive rescue package, while the European Union ruled out the need for immediate new aid to prop up Portugal or Spain.
But economists warned that such cause for optimism could be fleeting, and said the central bank's cautious stance and tone reflect this.
Indeed, in the U.S., just as some recent indicators - including higher home and auto sales - were suggesting the world's biggest economy was finally gaining traction, a report last Friday showed the labour market is still stuck in the mud, arguing in favour of the Federal Reserve's controversial decision to create $600-billion (U.S.) to buy longer-term Treasuries to keep downward pressure on interest rates.
Even in Australia, one of the advanced world's fastest-growing economies, central bank governor Glenn Stevens on Tuesday kept interest rates on hold, citing global worries including the European crisis.
"This thing is far from over, and I think the [Bank of Canada]was kind of reflecting that," Michael Gregory, a senior economist at BMO Nesbitt Burns Inc. in Toronto, said in an interview. "There are ripple effects. They pale in comparison to the risks we face from the U.S., but they're still there and it's something other central banks are keeping in mind." The slow U.S. recovery, and fears that the debt crisis in Europe could worsen or spread, are helping Mr. Carney brush off a hotter-than-expected inflation reading from October.
On Tuesday, he said inflation dynamics in Canada have been "broadly in line" with his expectations, and that "underlying pressures affecting prices remain largely unchanged."
The central bank's next rate decision is scheduled for Jan. 18, and it will release an updated forecast for the Canadian and global economies the next day.