–Sees Growth Slowdown Because of Geopolitical Tensions
By Gloria Galloway
OTTAWA (MaceNews) – Canada’s economic growth will be weaker in the near term as geopolitical tensions create global uncertainty and domestic indicators remain mixed, the Bank of Canada said Wednesday in its January Monetary Policy Report.
Despite the slowdown, the Bank is maintaining its target overnight rate at 1.75%. That puts Canada’s Bank Rate at 2% and the deposit rate at 1.5%.
The overnight rate has held at 1.75% since October 2018.
Bank of Canada Governor Stephen Poloz told a news conference following the policy decision announcement that that rate remains “appropriate” but he did not rule out a cut in the future.
“The analysis that goes with that suggests that there is emerging there some downside risk to the outlook for inflation,” said Poloz, answering a question from Mace News.
“So I am not saying that the door is not open to an interest rate cut. Obviously it is open,” he said.
The Bank believes the current slow rate of growth is temporary,” he continued, “but temporary could be longer or shorter. “To the extent that it is larger, “that opens up a larger output gap and puts more downward pressure on inflation and we would have to come back to that decision and decide then whether or not the interest rate as it is today remains appropriate.”
The Bank now expects Canada’s near-term growth to be weaker and the output gap to be wider than it projected in October. It is estimating that growth in the fourth quarter of 2019 was 0.3%, and that growth in the first quarter of 2020 will be 1.3%
“Quite a lot has happened in the past three months,” Poloz said
“The National Accounts data for the third quarter of 2019 showed a significant slowdown, as we expected, and monthly GDP data have extended that slowdown into the fourth quarter. We also received a string of disappointing readings related to the Canadian consumer.”
Although the global economy is stabilizing, a number of factors have contributed to Canada’s slowdown including falling exports, weaker business investment, declining job creation, and reduced consumer confidence. On the other hand, residential investment remains robust.
The Bank also says there were some special issues at play in 2019 that added to the weakening domestic economy including strikes, poor weather, and inventory adjustments. In addition, Canadians have been saving more of their incomes. But the Bank is predicting that household spending will pick up modestly in the coming year due to population and income growth as well as a recent federal income-tax cut, and that business investments and exports will rise.
As a result, the Bank projects that Canada’s real GDP will grow by 1.6% this year and by 2% in 2021, following growth of 1.6% in 2019. This lags behind the global economy which the Bank predicts will grow by just over 3.0% in 2020 and by 3.25% 2021.
At the same time, Canada’s inflation rate is predicted to hold at around 2% with some fluctuations due to volatility in energy prices. The Bank says that is consistent with an economy that has been operating close to capacity.
Although trade tensions have declined and the global economy is stabilizing following U.S. deals with China and the pending ratification of the Canada-United States-Mexico Agreement, the Bank says an escalation of conflict in the Middle East could have significant negative macroeconomic effects. Its projections assume that risk does not materialize.
–This story has been updated with remarks from the post-decision press conference.