Bank of Canada Governor Stephen Poloz is talking about the financial crisis, but he’s describing spaghetti sauce.
“If you look carefully at a pot of simmering spaghetti sauce, under every bubble there is a crater that’s equal in size,” the central bank’s top chef told members of the Vancouver Board of Trade last week.
“Central banks have been filling that crater with liquidity, so we can row our boats across it.”
The awkward boats-and-sauce analogy is just one of the ways that Mr. Poloz, a trained economist and former head of Export Development Canada, is distinguishing himself from his predecessor, Mark Carney.
Mr. Carney’s style was to show off his intellect. He revelled in being the smartest guy in the room.
Mr. Poloz’s manner is more folksy, and he’s always looking for a way to break down the complex into more understandable chunks. So a credit bubble becomes pasta sauce.
It’s now apparent that another feature of the Poloz style is unbridled optimism. He is a glass-half-full kind of guy.
In Mr. Poloz’s view of the world, the Canadian economy is at “a tipping point,” poised for much stronger growth. The country is on its way “home” to more normal conditions, he said in Vancouver. Exports are about to surge, confidence is building and those companies that Mr. Carney chastised for hoarding cash will soon expand and invest, he said in a speech that a Toronto-Dominion Bank economist characterized as a “pep talk.”
And there is no bubble forming in the housing market, in spite of record household debt and prices that even the OECD says are among the most overvalued in the world. “I don’t foresee that there is a bubble in the housing market,” Mr. Poloz insisted in Vancouver.
Mr. Poloz’s cheer-leading on the economy hasn’t gone unnoticed, even by one of the key people who hired him – Finance Minister Jim Flaherty.
“I’m a little more cautious. I think he’s a bit more bullish than I am,” Mr. Flaherty told CTV last week – an unusually candid admission that the finance minister is not on the same page as the central bank governor, at least on the subject of the economy’s health.
Other economists are skeptical of Mr. Poloz’s rosy outlook, which appears to be at least partly at odds with the central bank’s own forecasts.
Mr. Poloz’s conviction that the Canadian economy is turning the corner and ready to start firing on all cylinders is “misplaced” and “overly optimistic,” according to David Madani of Capital Economics. Among other things, an imminent export rebound is more wishful thinking than reality.
“Not only does this view jar with the incoming trade data, but it also contradicts the [Bank of Canada’s] earlier published forecast which pegged housing to be a drag on the economy this year and next,” Mr. Madani pointed out in a research note Friday.
Bank of Montreal chief economist Douglas Porter is also puzzled by Mr. Poloz’s contention that business spending is ready to come back strong.
“Looking at the [Bank of Canada’s] own business outlook survey of investment intentions and the actual trend in business spending raises doubts on this score,” Mr. Porter remarked. Both indicators have been steadily falling so far this year, he pointed out.
This all raises the intriguing question of whether a central bank chief should be talking about the economic conditions he wants to see, rather than the ones that really exist.
Central bankers often use their perspective on where the economy is headed to guide financial markets about the future direction of benchmark interest rates.
But there is no suggestion that Mr. Poloz’s talking up of the economy says anything about rates. Most economists expect the Bank of Canada to keep its key overnight rate at 1 per cent until at least late next year, or even early 2015.
Mr. Poloz’s forecast of an improving economy may yet come to pass. But it should be treated as the observations of an economist, with a margin of error, rather than official pronouncements from the central bank.