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Economy Poloz sees evidence of ‘front-loaded’ oil shock

Bank of Canada Governor Stephen Poloz takes part in a news conference upon the release of the Monetary Policy Report in Ottawa January 21, 2015.

© Chris Wattie / Reuters/REUTERS

Bank of Canada Governor Stephen Poloz said recent evidence is telling the central bank that the damage from the oil shock is hitting the economy earlier and spreading faster than he had previously anticipated – which could mean a disappointing first quarter but an earlier rebound from oil's economic drag.

In an exclusive interview Friday with The Globe and Mail, Mr. Poloz elaborated on Wednesday's rate-decision statement from the bank, in which it decided to hold its key rate steady in the wake of January's unexpected cut to 0.75 per cent from 1.0 per cent. In the statement, the bank said, among other things, that the impact from the oil shock looks more "front-loaded" than it originally thought in its January projections.

Mr. Poloz clarified that this means the bank now believes first-quarter economic growth could be weaker than the 1.5 per cent annualized rate bank anticipated in January, but that second-quarter growth, in turn, would exceed the bank's identical 1.5-per-cent projection. That would set the stage for an acceleration in the second half of the year as the growing U.S. economy and export demand add more fuel to the Canadian economy.

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Mr. Poloz said the fourth-quarter gross domestic product report, released earlier this week, cemented the bank's view that the oil-shock effects are working their way into the economy sooner than the bank had expected.

"When you look at the details and sure enough, I think what we're seeing are the early effects of the oil price decline already in the fourth quarter, more than I would have expected," he said. "You can see it in consumption, you can see it in housing, you can see it in investment."

"It looks to me like it's happening a little faster and it's spreading a little faster [through the broader economy]," he said.

That earlier-than-expected impact implies that more of the slowdown from oil will come sooner, he said, though the bank is not yet prepared to formally adjust its projections for the first half.

"We'll do more work on this over the next six weeks and say more in April [when the bank releases its next rate setting and economic projections in its quarterly monetary policy report]," he said.

Mr. Poloz argued that this increasingly front-loaded appearance to the oil shock makes an even stronger argument in favour of the bank's decision to cut rates in January, rather than, as some critics have suggested, using the January rate decision to forewarn the markets of a cut that then could have then followed in March.

"The more front-loaded it is, the more glad I am that we acted right away, as opposed to waiting," he said.

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"We put that buffer in place right away and it's there in time for what we think will be the most affected quarter, which is the one we're sitting in right now."

"If you're going to have a fall, you might as well put the cushion underneath the fall, as opposed to bringing the cushion in after you've fallen."

He suggested that should the first-quarter numbers be disappointing, his inclination would be to view that as an "earlier" drag from oil, rather than a "bigger" drag.

"That would be my interpretation, that it looks like it's happening faster than we originally would have said," he said. "But we won't really know until we see the positives showing up more – and that will be in Q2 at the earliest, and Q3."

He said that at some point in the second half of the year, the improving momentum in the non-energy export side of the economy should take over from the oil-related slowdown as the economy's dominant feature, and the overall theme should again be an economy that is gradually closing its output gap. He noted that the export-oriented side of the economy is growing at an annualized rate of more than 5 per cent, double the pace of the overall economy in the fourth quarter.

But the timing of that "crossover" to non-energy exports taking over the country's economic driver's seat remains in question, he said.

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"By the second half, all of the positives should be dominating," he said.

"When does the total show a stronger economy, as opposed to a weakening economy? That's the only question that's left now."

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