The Bank of Canada is belatedly acknowledging that the export recovery isn't evolving as fast as predicted amid weak growth beyond Canada's borders.
The central bank opted once again Wednesday to keep its key overnight interest rate at 0.5 per cent, where it has sat since July, 2015.
Many economists now say an eventual rate hike may still be another two years away. A minority, including Paul Ashworth of Capital Economics Ltd., even argue the bank's more downbeat tone suggests a rate cut may be on the table as early as next month. "[The statement] opens the door to a rate cut just a crack," Mr. Ashworth said in a research note.
The bank said it is still projecting a "substantial rebound" in the second half of the year as the economy gets a lift from federal spending, rebuilding from the Alberta wildfires and recovering oil production. The bank pointed out that Canada Child Benefit payments, which the government began issuing in July, will boost consumer spending throughout the fall.
A favourite theme of Bank of Canada Governor Stephen Poloz has been that Canada is poised to reap the benefits of a recovering global economy by selling a lot more to the rest of the world. But a series of unexpected setbacks – including the oil price collapse, Alberta wildfires and an economic stall in the United States – have led to serial disappointment for Mr. Poloz.
On Wednesday, the central bank conceded that July's export bounce hasn't been enough to make up for an export slump earlier in the year that was "larger and more broad-based than expected."
The problem goes well beyond oil, and spans much of what Canada produces, from cars and aircraft to canola and lumber. Non-energy export volumes remain 2 per cent below where they were at this time last year.
"While the strength in exports in July was encouraging, the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July," the bank said in a statement accompanying the rate decision.
The central bank blamed global growth, which it said is not picking up as fast as expected in July, when it released its last set of forecasts. The main culprit was a contraction in U.S. business and residential investment in the second quarter.
"There is little doubt that non-resource exports have been a disappointment this year, and the bank has finally admitted the fact," said Bank of Montreal chief economist Douglas Porter.
Some economists speculated that the bank's surprisingly pessimistic tone may be part of an effort to keep downward pressure on the Canadian dollar and short-term interest rates.
The Canadian dollar, now at 77 cents (U.S.), lost roughly a third of a cent Wednesday, a drop analysts attributed to the bank's gloomy tone. A lower dollar and lower interest rates generally help drive exports and business investment.
Canada's economy shrank 1.6 per cent in the second quarter, dragged down by the effect of the wildfires on oil production in and around Fort McMurray, Alta.
Some economists are already scaling back their expectations for next year and beyond. In a report released Wednesday, CIBC chief economist Avery Shenfeld said Canada's economy won't hit 2-per-cent growth until 2019 at the earliest. CIBC is now forecasting growth of 1.8 per cent next year, down from 2.1 per cent, and 1.9 per cent in 2018.
"Anemic capital spending plans, even outside the energy sector, suggest that the draw of a cheaper Canadian dollar isn't yet enough to offset sluggish global growth and the resulting lack of pressure to add fresh capacity," Mr. Shenfeld said.
CIBC doesn't expect the central bank to raise the overnight rate until mid-2018.
In its statement, the Bank of Canada also gave a nod to an apparent cooling in the once red-hot Vancouver housing market. Sales have plummeted in recent months – an apparent response to a new 15-per-cent tax on foreign buyers and a dearth of buyers able to afford the city's inflated prices.
But the bank continues to fret about the dangers of high household debt levels.
"While there are preliminary signs of a possible moderation in the Vancouver housing market, financial vulnerabilities associated with household imbalances remain elevated and continue to rise," the bank said.
The central bank's next scheduled rate-setting announcement is Oct. 19, when it will release its final forecast of the year.