In the Bank of Canada's war against the country's economic shortcomings, household debt is just half the battle. With the central bank gaining ground in that campaign, it is opening up a second front: Corporate investment.
In both its statement outlining its latest interest-rate decision and its quarterly Monetary Policy Report , the bank placed the blame squarely on "weaker business investment and exports" for Canada's surprisingly tepid economy in the second half of 2012. It noted that business investment is lagging where it should normally be at this stage of an economic recovery, and warned that exports are at least 18 months away from returning to their pre-recession highs. It fretted that the depressed prices for Western Canada's heavy crude are both starving the country's export numbers and discouraging corporate investment in the oil patch – and identified this as a significant drag on economic growth.
This is the strongest evidence yet that the Bank of Canada is shifting its emphasis to the investment-and-exports theme as it sees signs that the household debt problem is turning a corner. And in fact, it's all interrelated.
In a speech two weeks ago at Queen's University, the bank's second-in-command, Tiff Macklem, connected all the dots. He said that eliminating the household sector's financial deficit – to the tune of about $50-billion – "would leave a noticeable gap in the economy." But a modest improvement in exports could fill that gap pretty quickly. He said exports are running about $123-billion behind where they would be if they were on a normal post-recession recovery trajectory; if they could just close two-fifths of that gap, he argued, it would make up for the reversal in household debt.
And how would could we return exports closer to their historical path? Not by sitting around waiting for a weaker currency, as exporters have been accused of doing in the past.
"Hoping for a weaker Canadian dollar is not a business plan," Mr. Macklem said.
Ultimately, he argued, Canadian exporters need to get more competitive. One key way to do that, he said, is by investing more on machinery and equipment. Which they haven't been doing.
And the circle closes. This is why the Bank of Canada has been nagging business about sitting on massive cash holdings ("dead money," Bank of Canada Governor Mark Carney has called it), rather than putting it to productive use.
The problem is, the blunt instruments wielded by central bankers can't do much to make businesses invest more. Low interest rates are its best tool – discouraging saving and keeping business borrowing attractive – but we already have those, and still businesses are reluctant to spend.
No, the Bank of Canada is going to need the federal government's help getting there – just as it did with the tougher mortgage rules that finally put the brakes on household debt. Ottawa will have to back up the Bank of Canada's desires with tax incentives to encourage companies to open their wallets.
Without that, the Bank of Canada may find it is winning one important battle, but losing the war.
David Parkinson