The Bank of Canada, looking past surprisingly strong job growth at the end of 2012, is downgrading its short-term outlook for the economy as exports continue to languish.
Speaking at Queen's University in Kingston, Ont., on Thursday, Tiff Macklem, the central bank's senior deputy governor, said "near-term momentum appears to be slightly softer than previously anticipated."
That's not a big shift from the way the central bank was looking at the economy at the end of last year – Bank of Canada Governor Mark Carney made similar comments last month, and Mr. Macklem made clear that policy makers continue to believe growth will gather pace over the course of the year.
But it shows that the central bank thinks Canada's impressive job creation of late is a thing of the past.
Statistics Canada reported last week that Canadian employers added almost 40,000 jobs in December, against expectations for the creation of a mere 5,000 positions, suggesting the economy could be defying predictions of a slowdown.
The central bank isn't buying it. The hint of disappointment over the economy's performance from the Bank of Canada's No. 2 official will harden the consensus view on Bay Street and Wall Street that Canadian interest rates will remain unchanged at least through mid-year.
Michael Gregory, an economist at BMO Nesbitt Burns in Toronto, said after Mr. Macklem's speech that slower growth could mean a lengthier delay in inflation becoming a pressing policy concern, which could push an increase in interest rates into 2014.
Mr. Macklem's return to the university where he earned his bachelor's degree in economics was the last scheduled public appearance by a Canadian central banker before the next policy announcement on Jan. 23.
The lecture had added significance because it marked something of a coming-out for the heir apparent to Mr. Carney, who will leave Canada to take over as the governor of the Bank of England at the start of July.
Mr. Macklem made no reference to Mr. Carney's departure in a presentation to room crammed with almost 200 students, and he received no questions about his status as front-runner for the Bank of Canada's top job. Mr. Macklem delivered a forceful analysis of the state of the Canadian economy, but avoided breaking new ground.
However, Mr. Macklem's unenthusiastic take on the current state of the economy is sure to gain notice. The darker outlook on Canada's immediate prospects suggests the central bank is putting greater weight on indicators such as exports, which plunged 2 per cent in the third quarter, and tepid business investment.
Another weak spot is the housing market, but the central bank's analysis of slower sales and falling prices is more complex. Housing was the main engine of Canada's escape from recession, but the cooling is mostly a relief – the central bank has deep concerns about the debt that Canadian households have piled up.
"As successful as it has been, this growth model is stretched," Mr. Macklem said on the campus he once inhabited as an economics student. "The balance sheets of households are stretched ... The good news is that there are now signs a gradual correction of these imbalances may be under way."
But a milder housing market means less economic activity. Ideally, weaker construction and fewer trips to building supply stores would be replaced by something else.
Mr. Macklem says growth must "rotate" toward a greater emphasis on exports – and that's not happening.
While Canada has recovered all the jobs lost in the recession, exports linger below their pre-crisis peak. A higher dollar is partly to blame, as is weakness in Canada's main trading partners and weak productivity.
"The strength and durability of the pickup in 2013 and beyond will depend critically on how successful we are in re-gearing our growth to exports, investment and innovation," Mr. Macklem said.