The long-awaited rebound in Canadian exports and business investment may be delayed, but it’s still coming, Bank of Canada Governor Stephen Poloz says.
Mr. Poloz characterized the problem Tuesday as a “temporary” setback for the Canadian economy caused by a raft of unexpected challenges, including a slower-than-expected recovery from recession in the United States.
“The conditions that will bring back the export path are more demanding than normally would be the case,” Mr. Poloz acknowledged in testimony to the House of Commons finance committee. “It is taking longer than we saw in the past.”
The Bank of Canada surprised financial markets last week by abandoning its bias toward raising its key interest rate in favour of a balanced monetary stance. It also slashed its forecast of economic growth in Canada for 2013 and beyond.
The moves triggered a drop of about 1.5 per cent in the Canadian dollar, to 95.5 cents (U.S.) from nearly 97 cents. Mr. Poloz characterized the drop in the dollar as “not a very significant change.”
The bank’s senior deputy governor, Tiff Macklem, testifying alongside Mr. Poloz, insisted that conditions are ripe for both an export rebound and for Canadian companies to resume investing.
“The table is set for stronger investment,” Mr. Macklem told the committee. “What they need to see is a reduction in uncertainty and a pick-up in demand.”
He pointed out that U.S. private-sector activity is coming back and the impact of government spending is fading. “The U.S. is poised for stronger growth,” he said.
Mr. Macklem also suggested that competitive weaknesses have hurt Canadian exports – namely, the high Canadian dollar and weak productivity. The dollar, he said, accounts for about two-thirds of the competitive problem and lagging productivity for the rest.
“The biggest reason exports have been weak is that the U.S. economy, our major export market, has had the deepest recession and the slowest recovery since the Great Depression. So that by itself sets a weak track for an export recovery,” Mr. Macklem said.
He added that exports of oil and other commodities have held up well. But most other exports have underperformed since late 2011.
In August, Canada posted a 20th consecutive monthly trade deficit with the rest of the world. And while exports to the United States rose 1.9 per cent to $30.1-billion (Canadian) in the month, Canada’s share of the U.S. market has been on a steady downward slide since 2000.
Mr. Poloz said reaching a free-trade agreement with Europe should help Canadian exporters diversify away from the United States, the destination of more than 70 per cent of Canadian exports. “We’ll always be exposed [to the United States], but having a free-trade deal opens up more doors and allows more of that diversification,” he said.
Mr. Poloz was also drawn into a controversy triggered by Finance Minister Jim Flaherty’s criticism of the U.S. Federal Reserve’s massive quantitative easing program to keep rates at record lows.
Unlike Mr. Flaherty, who has suggested it was bad policy, Mr. Poloz said quantitative easing has helped the U.S. economy. But he added that he hoped conditions would not deteriorate to the point where such emergency measures would be needed in Canada.
In an opening statement to the MPs, Mr. Poloz said the central bank is modifying the way it communicates its stance, “in order to explicitly capture the uncertainty that is inherent in our outlook.”
The aim is to give Canadians a better understanding of how risks to its inflation outlook evolve, rather than “simply compare a snapshot of the current forecast with that of our previous forecast.”