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Stephen Poloz faces troubled economic times

Stephen Poloz, after being named as the next governor of the Bank of Canada, during a news conference Thursday in Ottawa.

Adrian Wyld/CP

Stephen Poloz is inheriting an economy that has been losing momentum for months.

The good vibes that carried the Canadian economy out of the Great Recession are gone in the face of a host of new hurdles.

Now, the country faces a troubled neighbour to the south, the end of a long commodities supercycle, a deflating housing bubble, much more cautious consumers, and governments unable or unwilling to make up the gap.

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"There are a number of major changes on the horizon and they're all coming up negative for the Canadian economy," pointed out Arthur Donner, a former Bank of Nova Scotia economist and monetary policy expert.

Trade, manufacturing, consumption, housing and government spending are potential drags on the economy going forward, he said. And now commodities prices are slumping.

"We are a commodities exporter, but the terms of trade have moved out of favour for Canada," added Mr. Donner, now a consultant.

Perhaps most problematic, he suggested, is that Central Canada's manufacturing economy is shrinking at the same time as the commodity-driven economy of Western Canada is also heading into a funk. It is "incredibly unusual" that both Alberta and Ontario are decelerating at the same time, according to Mr. Donner.

A big problem for Canada, which sells most of its exports in the United States, is that increasing U.S. fiscal austerity is offsetting all the benefits of the monetary easing policies of the Federal Reserve. That's likely to keep the U.S. from gaining traction, Mr. Donner said.

"It's a tough economy for sure," remarked National Bank of Canada senior economist Krishen Rangasamy.

The economy may grow at slightly better than 2 per cent in the first quarter, thanks in part to a surprise return to trade surpluses in March. But Mr. Rangasamy said that was driven by energy exports to the U.S. caused by an unusually long winter.

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The first quarter may be a blip. Mr. Rangasamy said Canada's gross domestic product is likely to grow just 1.5 per cent for the year – a second year that the country trails the U.S.

And next year looks only marginally better, at 2.2 per cent, according to National Bank's forecast, substantially weaker than the 2.8 per cent pace forecast by the Bank of Canada.

Outgoing Bank of Canada governor Mark Carney has fretted for a year or more about the mounting debt burden of Canadians and the overheated housing market in parts of the country.

His successor inherits conditions that will be working in reverse. Housing prices are already falling in the most overheated markets, such as Vancouver, and housing construction is slowing.

At the same time, consumer credit growth is slowing. "That means more saving and less consumption," Mr. Rangasamy said.

All that will make homeowners feel and act less confident in the months ahead.

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And a slowing housing market will cost high-paying jobs.

Ottawa and most of the provinces aren't cutting spending. But spending growth is flat. "they're not cutting, but they're not expanding as they have in past years," Mr. Rangasamy said.

But there may be little the new Bank of Canada chief can do, given that interest rates are already extremely low.

As Adam Button, editor of ForexLive, put it in a blog Thursday: "Taking over the Bank of Canada at the moment is like a 747 captain handing the controls to his co-pilot on a trans-Atlantic flight. There's nothing to do but hold the wheel and make sure it stays on course."

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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