The current state of the Canadian economy can be summed up in one word: mediocre. It's not bad, and it's better than most. But it's not even close to very good. Consider unemployment: It plummeted in the three years after the recession, as Canada's recovery outperformed that of our peers. But in 2013, Canada hit a speed bump. The unemployment rate, at 7.2 per cent, was higher at the end of the year than at the beginning. The participation rate – the percentage of Canadians in the labour force – fell by nearly half a percentage point over the same period. Employment growth was the slowest since 2009. Demand for workers is hot in Alberta and Saskatchewan, but not strong enough in most of the country. In the largest province, Ontario, the jobless rate in December hit 7.9 per cent – unchanged from a year earlier.
And due in part to this "significant excess supply in the economy," as the Bank of Canada euphemistically puts it, inflation is stubbornly, disturbingly low. The Bank aims for 2-per-cent inflation, but the figure is currently running at about half that level. In the first quarter of 2014, it expects inflation of just 0.9 per cent, a drop from the last time it issued a forecast, and it doesn't expect Canada to return to the 2-per-cent comfort zone until the end of 2015. "The downside risks to inflation," said the Bank on Wednesday, "have grown in importance."
In the face of all of this, the Bank of Canada is doing the right thing. It isn't raising interest rates; in fact, it's no longer even talking about when it might raise them. It's focusing on what matters: inflation that is too low, and joblessness that is too high.
The promise of ultralow interest rates for years to come has two major side effects. One is a real problem. The other, under the circumstances, is nothing but a positive.
The problematic side effect of ultralow interest rates? Canadians could be tempted to take on ever more debt, and housing prices could be further stoked. It's a real concern. Over the past couple of years, to cool the housing market, Finance Minister Jim Flaherty tightened mortgage rules, for example cutting the maximum length of an insured mortgage from 25 years to 30. If housing threatens to heat up again, the response should be to rein it in through slightly tighter rules – a job for Mr. Flaherty.
And then there's that other side effect: the falling Canadian dollar. A bond market pricing in relatively lower Canadian interest rates, and a hoped-for U.S. recovery pushing up longer-term U.S. rates, have helped to drive the loonie down against the greenback. All other things being equal, that lower Canadian dollar will boost Canadian exports, and make each U.S. dollar earned worth more in loonies. The Bank has been counting on a jump in exports to help pick up the slack in the economy. A lower loonie may hurt national pride, but it will give a boost to an economy that needs one.