Donald Trump gets blamed for everything.
Although Bank of Canada governor Stephen Poloz didn't mention the Republican presidential candidate by name, he clearly pointed to U.S. political uncertainty as one of the reasons the Canadian economy won't do as well as he'd hoped.
A decline in the Canadian housing market caused by new federal mortgage rules was another reason the bank has delayed a Canadian growth takeoff by six months. But on the bright side, said Poloz, that will reduce "financial vulnerabilities" by cutting the chances of a consumer debt meltdown.
Of course, Poloz was speaking before last night's presidential debate, but in his Monetary Policy Report, the bank governor drew a dotted line from poorer-than-expected Canadian exports to low business investment in the U.S. to uncertainty over American politics.
"(There are) uncertainties that may play on investment decisions, particularly in the U.S. but also in Canada around the U.S. election process that raise a lot of questions in people's minds if they're thinking about a major investment," Poloz explained during yesterday's press conference. "So it's natural for people to delay those decisions until afterwards."
That sounds like a short-term problem. But actually, confusion over the possibility of a Trump win, with its implications for trade and monetary policy, may have had an increasing effect on investment since the bank's last report.
And even if Democratic presidential candidate Hillary Clinton wins the election as most credible polls now predict, the ferocity of the campaign and the demands on Clinton to make significant changes could mean "afterwards" doesn't come until well into the new year.
As we've seen with the Canada-U.S. fight over softwood exports, an anti-trade sentiment in the U.S. has strengthened the hand of protectionists in a way that may last long after the election.
International trade has been weaker than the bank expected, part of a long-term slump in trade and investment. Weakness during the first half of the year in U.S. sectors that have traditionally absorbed Canadian exports has also hurt.
On the bright side, oil investment may have bottomed out after a long decline in energy prices.
But Poloz says Canadians aren't without blame for the country's export failures.
"Just like the Sherlock Holmes mystery, you've gone through all the obvious things," Poloz said. "It must be the least obvious thing that's left."
Presumably the governor has donned his Sherlock Holmes hat with the flaps, because he has deduced the other half of Canada's export slump is due to a failure of Canadian competitiveness.
Export capacity, lost during the long oil and resource boom when the Canadian dollar was high, is proving hard to rebuild. The Bank of Canada also worries the country has lost its competitive edge because of problems like out-of-date infrastructure and rising electricity costs, and that a return to export success may require more than just waiting patiently for a cyclical rebound.
But exports aren't the only reason the bank has rolled back the Canadian recovery. According what Poloz admits is a "highly uncertain" calculation, part of the growth slowdown is a self-inflicted injury — the new housing rules imposed by Finance Minister Bill Morneau.
"Although this effect is very uncertain, we have incorporated a shock of minus 0.3 per cent by the end of 2018," Poloz said. If those calculations are correct, that's about half the damage being caused by the drop in exports.
He says the mortgage stress tests and other provisions to limit the spending of people entering the housing market may force some to buy smaller or cheaper houses. Or it may make others wait longer to increase their down payment, pushing them out of the market altogether and slashing growth in the construction industry, until now a powerhouse of the Canadian economy.
Either way, the dark cloud has a silver lining because it also slashes the risk to the economy from consumers saddled with too much debt.
Faster growth in the U.S. economy poses a special risk to Canadian borrowers. This week we heard inflation there hit a five-month high, one more reason for the U.S. central bank to raise interest rates, which will likely translate into higher consumer rates on this side of the border.
- Bank of Canada holds key interest rate at 0.5%
- Mortgage stress test gets Poloz off the hook on interest rates
And despite the general tone of optimism in yesterday's monetary report that "the global economy is regaining momentum," even Poloz doesn't rule out trouble ahead. And that would mean keeping consumer debt in check could have a big payoff.
"If those vulnerabilities that we've identified meet up with a global shock, say, a new slowdown in the world or even a recession," said Poloz, "those effects on Canada would be magnified a lot by that indebtedness and the quality of the indebtedness."
Follow Don on Twitter @don_pittis
More analysis by Don Pittis