For a guy coming out of what was probably the worst quarter for the Canadian economy in nearly four years, Stephen Poloz is doing his best to be optimistic. Heck, he can't even be baited into saying "atrocious" again.
The question is whether he has a right to be. And the answer, for now, is we'll just have to wait to see. So will he.
In his news conference following Wednesday's release of the Bank of Canada's quarterly Monetary Policy Report, a couple of reporters took a run at getting the central bank's governor to repeat his damning one-word assessment of the economy's first-quarter performance, uttered in an interview with a Financial Times reporter last month. Despite having just pegged first-quarter growth at zero in the updated economic estimates contained in the MPR, Mr. Poloz wouldn't bite.
Perhaps that reflects a desire to put a somewhat regrettable quote behind him – avoid having "atrocious" become his own version of Alan Greenspan's "irrational exuberance" – a catch phrase that attached itself to the former U.S. Federal Reserve chairman's legacy like a barnacle. But more to the point, the Bank of Canada is ready to get past the recently ended first quarter and to look to the future – which it insists was made that much brighter by the darkness of the first three months of the year.
This has been the bank's script for a while now: The first quarter would bear the brunt of the oil hit, clearing the way for a rebound in the second and beyond, as the oil shock fades and other drivers, chiefly non-energy exports, take over. The stagnant first-quarter estimate takes care of the first part of the plan. But the second part remains far from certain.
Mr. Poloz is sticking with his thesis that the oil shock's impact has been "front-loaded," on the logic that the evidence to date still looks like it fits that thesis. But it's like a jigsaw puzzle: The pieces can sit in the middle of the table and look like they'll fit, but it's only when the puzzle fills in that you can see if you've really got the picture correct, or if you hammered pieces in with your fist where they didn't really fit at all.
And, frankly, we don't even have full economic data from the first quarter yet, let alone any evidence of the rebound and economic acceleration that Mr. Poloz is confidently predicting for the rest of the year. So, we've barely started this puzzle. We're looking at the legs. We're pretty sure it's a horse. But what if it's a giraffe?
The body will start to take shape in the second quarter, which began two weeks ago. The Bank of Canada predicted in the MPR that growth will be about 1.8 per cent annualized in the quarter – up from its previous forecast of 1.5 per cent, but still a pretty modest pace.
That, at least, looks like a pretty conservative call. Despite having expressed confidence that the oil shock will have been largely a first-quarter phenomenon, the bounce-back the bank is forecasting for the second quarter is nowhere near on the scale of the slowdown of the first quarter. If Mr. Poloz and company are even remotely right about how this will play out, the bar they've set for the second-quarter bounce-back looks pretty low.
But further down the line, the Bank of Canada's new forecasts align to get the bank right back to where it wanted to be in terms of the anticipated return to full capacity and its 2-per-cent inflation target; i.e., the end of 2016 – despite the loss of an entire quarter of growth. Conservative is not the first word starting with "con" that comes to mind. Convenient, perhaps.
And Mr. Poloz seems willing to look past any pieces that don't quite fit. He's confident that the non-energy upturn is evolving as planned, pointing to harsh winter weather and U.S. West Coast port strikes to explain weak trade data. He talks about improving "quality" in the labour market even as job growth has remained choppy.
The reality is that the Bank of Canada is still very much in wait-and-see mode on when and how Canada will emerge from its oil shock, and how well the bank's surprise rate cut in January is working to cushion the blow and speed up the recovery. Mr. Poloz acknowledged that "the key analytical question we face" is whether the second quarter does, indeed, deliver evidence confirming that the oil shock was earlier than expected, and not bigger than expected – which would change everything.
But given the fairly modest prediction for the second quarter, the new forecasts may effectively kick the can on the bank's oil-shock-recovery thesis even further down the road, to the third quarter. That's when the bank is calling for a brisk 2.8-per-cent growth rate that contains the bulk of the post-shock rebound – and will prove critical if the bank is to stay on course for its end-of-2016 target for a return to full capacity.
It's not a bad thing that Mr. Poloz is optimistic that he's made the right call; a little optimism is welcome after the quarter we just had. But until we see a lot more data, it remains an encouraging theory that requires a fair bit of positive thinking to prop it up.