Canada's hoped-for export recovery has begun, but the gusher of jobs and investment that was to follow remains elusive.
Mindful of this good news-bad news narrative, the Bank of Canada opted Wednesday to signal no shift in its neutral rate signal, and once again left its key overnight lending rate at 1 per cent, stretching to four years the longest Bank of Canada rate freeze since the 1950s.
The U.S. economy is "back on track," Europe is "faltering" and much of the recent pickup in inflation is transitory, the central bank said in its sixth rate statement of the year.
The central bank acknowledged that exports have come back strongly after the harsh winter, buoyed by a lower Canadian dollar and stronger U.S. demand. But it warned that the economy is still being held back as many exporters balk at hiring and investing.
"While an increasing number of export sectors appear to be turning the corner toward recovery, this pickup will need to be sustained before it will translate into higher business investment and hiring," the central bank said in a five-paragraph statement.
Typical of this prudent mindset is Transformix Engineering of Kingston, which makes high-speed assembly machines for manufacturers of small plastic and metal parts. The company has added a handful of new employees to its work force of 50 in recent months following a batch of new sales in the U.S. and Europe.
"We're cautious," said Peng-Sang Cau, president and chief executive. "We've been through challenging times and we just want to make sure we're though that hurdle."
Clearpath Robotics of Kitchener, Ont., has likewise seen export sales jump since the beginning of the year, particularly to the U.S. The five-year-old maker of all-terrain mobile robots has nearly doubled its work force to 65 from 34 since January, but those jobs are all tied directly to new orders from U.S. mining companies and other industrial users, chief operating officer Bryan Webb said.
"We've definitely seen things pick up in the past six months," Mr. Webb said. "It seems like funding has been released for capital projects, and that funding is benefiting us."
An export surge of nearly 18 per cent in the second quarter helped propel the Canadian economy to a 3.1-per-cent growth spurt in the April-to-June period.
And yet the jobless rate has been stuck at or near 7 per cent for a year, while business investment has stagnated for two years.
"The recovery may be under way, but the Bank of Canada isn't ready to sing its praises," said Emanuella Enenajor, senior Canada economist at Bank of America Merrill Lynch. "While the bank gave a nod to stronger exports, their statement was peppered with caution."
Economists read the central bank's guarded tone as further evidence that it is unlikely to raise interest rates any time soon – perhaps not for another year, and possibly well after the U.S. Federal Reserve starts hiking.
Several economists have recently pushed back to late 2015 their call on when the central bank will start ratcheting up its key interest rate after comments last week from Governor Stephen Poloz. At an economic conference in Jackson Hole, Wyo., Mr. Poloz suggested he might wait until after the Fed starts raising rates, pointing out that at 1 per cent Canada's rate is already higher than those of many other central banks.
Wednesday's statement offered no clear indication on the timing of the next rate move, beyond the widely expected confirmation that the central bank remains in a so-called "neutral" stance. That implies that its next move could either be a rate hike, or a rate cut, if conditions deteriorate.
But Royal Bank of Canada assistant chief economist Dawn Desjardins said she expects the central bank to shift to a tightening stance before the end of this year, followed by a rate hike in 2015.
Bank of Montreal chief economist Douglas Porter agreed the rate statement showed subtle signs of nudging toward interest rate tightening. Among other things, the bank did not identify any new looming threats to the recovery or the inflation outlook, he said.
The Bank of Canada said recent data confirm its earlier assessment that signs of higher inflation are largely temporary. The bank said a spike in energy costs, a lower dollar and "sector-specific factors" are driving some prices higher. But these don't point to "any change in domestic economic fundamentals," the central bank said.