Bank of Canada Governor Stephen Poloz said in an interview that he remains concerned about the state of the Canadian economy in the wake of the financial crisis, but views the loonie's sharp slide in recent months as a welcome development, since it signals growing momentum in the U.S. economy.
"Things that might have made Canada look like a safe haven relative to the U.S. have dissipated to a degree. We're still a safe haven, but relatively speaking, the U.S. is coming back into its own," Mr. Poloz said in a room overlooking the Sydney Opera House, where he is attending a Group of 20 meeting of central bank governors and finance ministers, including Jim Flaherty.
"Right now, [the] most important thing that we're watching is the growing momentum in the U.S. economy," Mr. Poloz continued.
"If that is the reason why the Canadian dollar has come down a little in the last few months, then we say, 'Well, the most important thing there is the U.S. economy is gathering momentum.' That's really important to us. If the strong U.S. dollar is a symptom of that, then that's a welcome development. It's not about what the Canadian dollar is, per se."
The Bank of Canada Governor's remarks come as global financial leaders in Sydney fret about low growth, low productivity and stubbornly high global unemployment. The strengthening economy in the U.S., however, has been a bright spot in an otherwise sluggish global economy, with slowing growth in China and severe structural problems in a host of fast-growing emerging markets – such as India, Turkey and Brazil – that helped pull the world out of the global recession and were being relied upon for a large share of growth.
But as the U.S. economy has strengthened, Mr. Poloz said, Canada's reputation for pushing through the crisis relatively unfazed has begun to wear thin – and an offshoot of that has been a declining Canadian dollar relative to the U.S. greenback. The loonie has fallen from around parity to around 90 cents (U.S.). A high dollar hits manufacturers and exporters by making their products more expensive, and heading into an election in 2015 with Ontario's industrial heartland battered, Mr. Flaherty has mused publicly that a lower dollar is good for Canadian manufacturers – leaving some observers to think that he was indirectly putting pressure on Mr. Poloz to push down the dollar.
Asked about this, Mr. Poloz denied it, saying the change of course he took in December – dropping the bank's bias to raise interest rates, a move that surprised investors – was a response to disappointing growth figures.
"Unless you think all the other stuff I said about the Canadian dollar was bogus analysis, and I hope you don't think that, there's a pretty big, fundamental story behind what the Canadian dollar has done in the last year," Mr. Poloz said. "And I'd say that has very little to do with what I or someone else might have said. It certainly has nothing to do with monetary policy independence."
In Australia, which is hosting the rotating G20 summits this year, there have been similar developments to those in Canada: There is a resource-fuelled boom in western Australia, whereas manufacturing in the eastern part of the country has withered – particularly after automotive sector subsidies were wound down and three major automakers declared their intention to stop manufacturing here. Mr. Poloz said that the "two speed" nature of Canada's resource boom and manufacturing problems is a natural outcropping of the global economy and that those "underlying discriminating forces will remain for several years."
Mr. Poloz added: "I want to make sure I don't sound gloomy."
What Canada needs now, Mr. Poloz said, are small firms to grow quickly – growing their employee base, and their productivity, in multiples not possible at larger corporations. Mr. Poloz said that, despite some encouraging signs of a rebuilding among smaller companies, that he remains concerned by the devastating impact of the recession on Canadian businesses – and that they might still be hesitant to hire more employees or invest in new equipment to boost productivity.
"Having been through this terrible period, no wonder they'll be a little gun shy," Mr. Poloz said. "There are reasons to be optimistic. But there's just not the numbers yet."
One of the main themes developing as the G20 summit begins has been the continued financial and structural problems in emerging markets such as India. Mr. Poloz said that the "big effect" of this turmoil is largely behind us, though he said volatility is likely to remain in markets where the "fundamentals aren't as clear or not as strong."
At the same time, Mr. Poloz said Canadian commodity exporters who rely on China's demand for resources should not be overly concerned about the gradual slowing of that massive economy. Growth may be slowing, Mr. Poloz said, but China's post-recession economy had been "puffed up" by the country's large recessionary stimulus and the relative size of the Chinese economy is much larger today than it was five years ago.
"We don't think that there's any major downside risk in commodity prices," Mr. Poloz said. "But you'll always have commodity cycles."