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A cyclist passes the Bank of Canada building through a snow-covered sidewalk in Ottawa in this file photo.Chris Wattie/Reuters

A top Bank of Canada official is making an unusually candid admission: The economy is misbehaving.

"The macroeconomy has not been unfolding exactly as we had expected," deputy governor John Murray bluntly told an audience of accountants in Victoria, B.C. Thursday.

Inflation is stubbornly low, exports aren't bouncing back with global demand and businesses have cash, but refuse to invest.

Likewise, the housing market seems to defy gravity, even as all the usual warnings signs – including record high debt levels and prices – are flashing red.

Mr. Murray, making his last public speech before his retirement in April, acknowledged that Canadian household debt levels and home prices have reached levels "where real estate busts were observed in other countries."

But he said the bank remains convinced Canada is not headed for a U.S. or British-style housing crash, rejecting recent dire warnings from Deutsche Bank and others.

"It would be a mistake to assume that a similar outcome is therefore inevitable in Canada," he said.

Canada may be much more like Australia, which has managed a soft landing in real estate – which is still the Bank of Canada's "base-case projection" for Canada.

Mr. Murray said the central bank is struggling to figure out all of these macroeconomic puzzles. And so far, he readily admitted the central bank has only partial answers, and theories.

The answers may be due to forces outside the country, as much as within. Canada's experience, Mr. Murray argued, is "surprisingly similar" to what many other countries are going through than experts acknowledge.

"The tendency in these situations is to view the puzzles as uniquely Canadian and to look for domestic explanations," he said.

"Looking inward for answers might be too limiting, and cause us to ignore helpful information elsewhere."

On inflation, for example, he said that weak demand and intense competition between retailers doesn't fully explain why prices have been so slow to rise in the past two years. Similar patterns in other developed countries suggests it may be a "delayed response" to the shock of the Great Recession.

The conundrum of too many companies holding on to dead money and not investing is also not uniquely Canadian. Mr. Murray said new research in the U.S. suggests that companies may "gun shy" and "traumatized" by the effects of the recession, causing them to magnify current economic uncertainties.

Canada's weak export performance over the past two years isn't just about the once-high Canadian dollar and weakened competitiveness, he suggested. It's part of a global phenomenon, exacerbated by Canada's overreliance on sales to the budget-constrained U.S. government.

Mr. Murray said the central bank may have underestimated the impact on non-commodity Canadian exporters of U.S. budget cuts.

"The growth in global trade collapsed at about the same time and even more dramatically than the fall-off in Canadian trade," Mr. Murray said. "Perhaps the weakness in Canadian exports has a common cause and should be thankful for what we have."

Follow Barrie McKenna on Twitter: @barriemckennaOpens in a new window

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