Poloz has it mostly right but the future is complicated: Don Pittis

If you are a currency trader waiting for Bank of Canada governor Stephen Poloz to shake up the loonie this week, you're likely out of luck.

But behind the scenes, Poloz and his team will be working furiously to absorb some confusing new data.

That includes signs of a long predicted shift in the Canadian property market and "abysmal" Canadian growth figures. Poloz must prepare for an uncertain autumn.

• 26% slump in Vancouver real estate sales called return to normal
• Canada's economy shrinks 1.6% in 2nd quarter

With tomorrow's bank interest rate announcement limited to a paper release, the views of Poloz and friends will be even more impenetrable than usual. And with no news conference scheduled for Poloz to explain himself, a change in interest rates by the chief central banker is almost inconceivable.

Outrageous miss 

The bank's statement can hardly fail to mention its outrageous miss on the Canadian economy, which "grew by 2.4 per cent in the first quarter but is estimated to have contracted by one per cent in the second quarter," according to the bank's most recent forecast. 

Instead, the actual contraction, at 1.6 per cent, was closer to two than one and even worse than the 1.5 per cent consensus from private sector economists.

But in many ways, Poloz and his team have been right on the money.

Even before we saw the effect of B.C.'s new tax on foreign property buyers, the bank was warning of "financial vulnerabilities" in Toronto's and Vancouver's overheated housing markets.

• House price increases likely unsustainable

Poloz also predicted the June bounce in GDP that followed the debacle in May, caused partly by the fallout from the Fort McMurray blaze.

Canadians can only hope the bank's aim holds true. Perhaps June really will mark the turning point the bank has been promising month after month.

• Poloz and a potential Canadian rebound

Although July growth figures won't be available for another month, Canada had one positive indicator last Friday when the country's trade deficit tumbled by half, a figure much better than almost anyone had predicted.

• Trade deficit narrows in July

We also get a good substitute indicator at the end of this week when Statistics Canada releases its labour force survey for the month.

Not keeping up with America 

Lately Canada has not been keeping pace with our southern neighbour's boost in jobs and falling unemployment, which, despite missing expectations on Friday, continue to be stronger than Canada's.  

That divergence is just one of the things that could be keeping Poloz awake nights as his team of economists and analysts straggle back from summer holidays.  

Although I've predicted that Janet Yellen, the U.S. chief central banker, will not raise interest rates this year — at least not before the presidential election — there have been hints that rising wages and an improving employment picture in the U.S.  could push her to cool the economy well before Canada is ready.

Then, even keeping Canadian interest rates steady would begin to push the Canadian dollar down. But that may cause more headaches for the Bank of Canada if there are further signs of weakness in the Canadian housing market, since Canadian mortgage rates are strongly influenced by New York bond rates.

Despite some positive signs of a U.S. rebound, we are far from sure that the American and global economies are out of the woods. Many worry that rises in U.S. stocks are a chimera. Stock buybacks are declining and there are few signs that corporate profits are filling the gap.

Recession contingency plan

Some economists worry that, despite the feeling most of us have that U.S. growth has been insipid since its long recession from 2007 to 2009, on the simple basis of counting the years between historical recessions, the country is due for another any time.

While Poloz et al. have every reason to be optimistic that Canada's non-energy exports are on a comeback, a U.S. recession or a slump in housing — with inevitable economic implications — remains something for which the bank must make contingency plans. 

With rates so near zero, further cuts would push Canada into the weird world of negative interest. If that remains a serious alternative, the bank must gauge whether such a move has been effective in other places it's been tried and work through its potential implications for the rest of the Canadian economy. 

Recently Finland has begun experimenting with a basic income system. Italy is doling out money to its youth for cultural spending. Both are forms of "helicopter money," an alternative to cutting interest rates as a way of injecting stimulus into the economy from the bottom rather than from the top.

While it seems outside the Bank of Canada's traditional purview, creating effective options in case of a new economic downturn will be a priority.

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