Leaning against the wall in a corner of Bank of Canada Governor Stephen Poloz’s office is a framed copy of an article he wrote for The Globe and Mail, published on Aug. 8, 2001.
It was his contribution to a series of expert commentaries called, The Dollar in a Decade. As you might recall, there was reason to ask about the loonie’s future back then. The currency was trading at about 65 cents against the U.S. dollar, and there was plenty of talk about ditching the loonie in favour of a currency union with the United States.
That wasn’t the view of the future Bank of Canada governor, who saw the low dollar as a temporary phenomenon.
“The dollar is cyclically depressed presently, and as the world moves back to a steady growth path over the next year or so, it should appreciate by approximately 10 per cent,” Mr. Poloz wrote.
He was a bit early, but right. By 2003, the loonie began to climb, and by the end of that year it was worth 77 cents (U.S.).
Mr. Poloz’s predictive powers are significant because he once again is confronting deep-seated pessimism with a bet that everything is going to be all right. He said in Vancouver last week that normal growth – where all industries contribute positively to gross domestic product – is just around the corner.
The speech was met with a combination of mockery and disbelief: mockery over a poorly constructed metaphor involving spaghetti sauce and rocks; disbelief over the relatively positive outlook.
Capital Economics advised its clients to “heavily discount” Mr. Poloz’s economic outlook. David Madani, the research firm’s Toronto-based Canada watcher, listed a number of reasons Canada’s economy likely will continue to struggle. Manufacturing data show that factory production and exports are declining; shop floors are working at rates that are significantly below their potential. If not for aerospace, unfilled orders for manufacturing goods would be falling, not rising.
This is textbook economic analysis. It even could be correct.
But it’s not representative of the way that Stephen Poloz is thinking about the economy. Mr. Madini’s assessment is a pre-crisis approach to forecasting, using traditional data.
But Mr. Poloz is highly skeptical that the old rules of economic analysis apply in the post-crisis world.
“The context, as it was with [former] governor [Mark] Carney, is a whole different context in this period of time,” Mr. Poloz told me in his first in-depth interview as Bank of Canada governor, the basis for a feature story that will be published Friday in the October issue of Report on Business Magazine.
Mr. Poloz, who is fond of metaphors, says that today’s economic policy makers have a lot in common with the early sailors who were blown into the southern hemisphere for the first time. None of the navigational points are where they should be, and there’s no way to know if the instruments still work. That means getting home will require a greater reliance on logic, intuition and anecdotal evidence.
“There’s still some room for what David Laidler called the oral tradition,” Mr. Poloz said, citing one of his old professors at the University of Western Ontario.
For Mr. Poloz, the key for Canada is the creation of new companies, which in Vancouver he called the “natural engine of growth.”
The most important part of that speech was his discussion of the population growth of companies. He also mentioned it when we met in his office earlier this month.
Mr. Poloz reckons a healthy economy creates new companies at a pace of about 2 per cent a year.
Canada’s net creation of companies from 2008 to 2012 was nil.
This at least partly explains why exports haven’t come back as fast as economic models say they should have: there were too few companies left to make the sales.
That’s changing. In the first half of this year, the number of business establishments surged 3.74 per cent from the last half of 2012, according to Bank of Canada calculations using Statistics Canada figures. StatsCan warns that its tally of new businesses is imperfect, but the central bank governor seems to think it’s meaningful.
“This is excellent news,” he said in Vancouver.
New companies behave differently than established companies.
They invest heavily and hire in bunches to get off the ground.
This is why Mr. Poloz doesn’t trust the signals sent by indicators such as unfilled factory orders, which are dated. The growth that Mr. Poloz is waiting for will come from companies that weren’t around to participate in those surveys.