The Bank of Canada is poised to hold interest rates at an ultra-low setting until late next year, and perhaps even longer, to make up for lagging economic growth.
The central bank said Wednesday gross domestic product would expand 1.5 per cent in 2013, a significant reduction from January's estimate of 2 per cent, reflecting a slowing housing market and weaker commodity prices.
The revision puts the country on track for one of its weakest periods of growth outside of a recession, a humbling prospect for government officials who have spent the past several years portraying Canada as one of the world's stronger economies.
Canada shone in the aftermath of the financial crisis, as a banking system free of bankruptcies and bailouts helped turn record-low rates into a housing boom that offset massive drops in exports and business spending. Stimulus-fuelled rebounds in Asia also stoked commodity prices, which generated considerable wealth in Western Canada.
Housing and commodity prices now are in retreat, and other engines of growth – exports and business investment – are sputtering as the global economy struggles to gain momentum. Parts of Europe are stuck in recession and the recovery in the United States is frustratingly slow as high levels of debt continue to weigh on spending by governments and households.
Canada's economy is "flat-lining," said Chad Ulansky, chief executive officer of Metalex Ventures Ltd., a mineral exploration company based in Kelowna, B.C. "At this point, I wouldn't be putting money on a strong global recovery in 2014 that would be seen in Canada."
Yet rather than change course in the face of deteriorating economic conditions, the Bank of Canada instead is sticking with current policy, betting that borrowing costs already are low enough to pull Canada's economy out of its current funk.
Bank of Canada Governor Mark Carney ended more than a week of deliberations with his most senior advisers with a decision to leave the benchmark rate at 1 per cent, while repeating that borrowing costs will stay at that level for a "period of time."
Economists believe that means somewhere between late 2014 and early 2015.
The Bank of Canada offered clues, explaining in its latest quarterly economic report that the slower-than-expected growth to date means Canada is farther away from generating the level of output that would stoke inflation – a key metric for monetary policy makers, who are obligated by an agreement with the federal government to keep inflation at an annual rate of 2 per cent.
There is little danger of Canada exceeding that target.
Inflation – which averaged only 0.8 per cent in the fourth quarter and 0.9 per cent in the first quarter – likely won't approach 2 per cent until early 2015, according to the Bank of Canada's new forecasts. The central bank also pushed back its estimate of when Canada's economy would reach a level of output that would cause inflation – a point that policy makers describe as "full capacity" – to the middle of 2015.
Because changes in interest rates take months to influence the economy, the Bank of Canada will move to head off inflation before it actually starts to bubble over.
That argues for a shift in policy toward the end of the 2014. However, many economists and investors have grown skeptical about the Bank of Canada's ability to see the future.
Policy makers have cut their outlook for 2013 at every quarterly update since the fourth quarter of 2010.
On Wednesday, the Bank of Canada raised eyebrows with a prediction that the recovery in the U.S. housing market will trigger demand for exports that will ignite Canada's economy in the second half and into 2014.
The central bank actually raised its forecast for growth in 2014 to 2.8 per cent from its previous estimate of 2.7 per cent. That's stronger than what many Bay Street economists expect. The International Monetary Fund this week also cut its outlook for Canada this year to 1.5 per cent, but predicted the country would manage growth of only 2.4 per cent in 2014.
"The bank tends to be a little optimistic," said Darcy Briggs, who helps manage $4.5-billion in fixed-income securities at Bissett Investment Management in Calgary. "Exports haven't been adding to Canadian GDP for quite a while. It's possible, but the jury is out right now."
With a file from reporter Richard Blackwell.
RESOURCE INVESTMENT PICTURE DARKENS
The Bank of Canada is signalling a tepid outlook for capital investment in Canada's energy and mining sectors, suggesting the industries that helped lead the country out of the 2009 economic slump are pulling back when it comes to new construction, machinery and equipment.
The latest monetary policy report, released on Wednesday, notes that the oil and gas and mining sectors together account for 35 per cent of business investment in Canada, but surveys of investment intentions signal few new expenditures this year.
Using both Statistics Canada numbers and data collected by the Bank of Canada, the central bank said discounted prices for Alberta heavy oil, traded under the Western Canada Select (WCS) benchmark, coupled with ongoing lower prices for natural gas and global economic uncertainty, contributed to a marked slowdown in engineering investment in Canada in the second half of 2012. Junior and intermediate producers, the report said, are also having trouble accessing capital markets.
"In addition, concerns about the likelihood and timing of major pipeline projects, together with the rapid increase in the production of light oil in the United States, have led to uncertainty around pricing and market access," the report said. "This uncertainty persists and, notwithstanding the strengthening of WCS prices in recent months, is tempering investment intentions for 2013-14 as some firms are re-evaluating their projects."
Clinton Roberts, Alberta deals leader for PricewaterhouseCoopers, pointed out that while some projects are being curtailed, many oil sands projects will plow ahead in the coming years. "If you look at the oil sands, they get into a project, and they don't stop that overnight." Mr. Roberts said. "We have a lot of projects started, and investments committed to."