Business·Analysis

Despite 'serial disappointment' on Canadian recovery, Poloz is stubbornly upbeat: Don Pittis

Brexit and other global worries may have scared off some investors, but despite excess optimism in the past, Bank of Canada governor Stephen Poloz insist this time the recovery is real. And he says he has the numbers to prove it.

We've heard it before, but Bank of Canada governor says he can prove the economy is back on track

Stephen Poloz, governor of the Bank of Canada, and senior deputy governor Carolyn Wilkins were upbeat again Wednesday about a Canadian recovery just around the corner. This time they insist they have proof. (Justin Tang/Canadian Press)

Bank of Canada governor Stephen Poloz will have to forgive us if we say we've heard it all before.

Poloz and his senior deputy Carolyn Wilkins insist that despite the latest setback — this time blamed on Fort McMurray fires and Britain's Brexit vote to leave Europe — the Canadian economy is heading back to health and there is no need for a rate cut any time soon.

And they say this time they have the data to prove it.

Before the Bank of Canada's latest monetary policy report yesterday, a few analysts were hinting that the bank could actually cut interest rates to boost a weak economy. Others suggested that if not now, a rate cut was coming later this year.

Market surprise

But Poloz and Wilkins, who played a bigger role than ever in yesterday's monetary policy press conference, surprised the market by their determinedly optimistic tone.

Just as the report's embargo was lifted at 10 a.m. and its contents rushed out onto currency markets, the Canadian dollar popped up by half a cent, a sign of confidence in the Canadian economy and sign of a belief that rate cuts are not on the table in the near future.
Even before the 2008 crash, a strong Canadian dollar and foreign competition killed jobs in Canada's rust belt. Now the Bank of Canada is confident the economy is bouncing back. (CBC)

For those who follow the Bank of Canada statements from month to month and year to year, there is a vexing pattern to the bank's optimism. 

Recovery coming

The recovery is just over the hill and around the corner, Poloz tells us repeatedly. That is, once we get the current temporary problem out of the way.  

Poloz and Wilkins admit that the Canadian economy is by no means floating on calm seas. There are still sharks circling.

Of course the big threat hanging over the Canadian economy remains the overheated property markets of Vancouver and Toronto. The bank is very clear that this problem has not gone away. It seems Poloz remains hopeful that eventually lenders and borrowers will come to their senses.
Canada's oil and gas sector has been hurt by falling prices, but the Bank of Canada says the adjustment process will soon be over. (Associated Press)

"Prices appear to be outpacing anything you can write down as fundamentals," said Poloz, who warned explicitly of the rising risk of "flat or declining prices" but he says such a risk is almost impossible to quantify.

Beware extrapolation

"There can be a concern if people are basing their decisions on an extrapolation" of recent price trends, he warned. Extrapolation just means assuming what has happened will continue to happen.

Apart from steadily rising property prices in Vancouver and Toronto, signs of recovery have been choppy, said the central bankers.

The impact of fires in northern Alberta has hit the resource side of the economy. The process of adjusting to low oil prices will only come to an end around December. Non-resource exports have also been uneven.

"Export data has been particularly volatile," said Wilkins.
Stephen Poloz cites the Monetary Policy Report's Chart 6, showing non-commodity exports soaring back to their pre-recession peak, as proof that the Canadian recovery is on track. (Bank of Canada)

To a large extent that volatility can be laid at the door of Brexit, the disruption in markets caused by "unmeasurable, unquantifiable risks" as the new arrangement between Britain and Europe settles out over the coming months and years. European banks have already been hurt by the instability, said Poloz.

And Poloz says business investors, especially in Canada's critical U.S. market, have once again delayed plans to expand in the face of this new uncertainty imported from Europe.

So with all those uncertainties, why all the optimism?

Well, according to Poloz and Wilkins, it all comes down to Chart 6 in the July Monetary Policy Report.

'A great chart'

"We have a great chart in the Monetary Policy Report that shows that non-commodity exports have recovered almost to their pre-recession peak, which puts the recent volatility into perspective," said Wilkins in her opening remarks. 

Later, challenged for his optimism, which is so unlike many other commentators, Poloz admitted Canada had gone through "periods of angst" and that "serial disappointment is behind all this." But he had what he seemed to think was a foolproof answer. 
Stephen Poloz listens to Carolyn Wilkins, his senior deputy, who played a bigger role in Wednesday's news conference. Both insisted Chart 6 was proof that Canada is on track for recovery. (Reuters)

"You've seen Chart 6?" Poloz asked the reporter.

"Well, that's a lot of growth in non-commodity exports in the past few years, and especially over the past two to three years," Poloz drawled confidently. "That keeps our faith in the core narrative."

We can all hope that is true, but a statistician might notice a weak point in Chart 6: those dotted lines where the data has not yet been collected.

So while it is good to be optimistic, maybe we should take the governor's advice and be just a little bit wary of basing our decisions on an extrapolation. 

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About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.