Subtitle: Bringing Canada’s Economy Home
The Bank of Canada (BoC) Governor, Stephen Poloz, spoke in St. John’s NL late September. His speech was the first time speaking publicly since raising the Key Overnight lending rate twice since July 2017.
Mr. Poloz spoke about bringing Canada’s economy “home”. Home is defined at the intersection of full economic capacity and 2% inflation. I’m going to highlight four main issues the BoC is monitoring very carefully. In turn, I’m keeping a close eye on any data updates from these four categories.
Four Issues The BoC Is Monitoring:
- Evolution of economic capacity. As the economy improves, businesses move toward full capacity. Full capacity can be a moving target though. When companies increase investment they augment capacity they produce by raising productivity or increasing their workforce. This is positive for our economy, in a non-inflationary way. It’s important to note, it’s the LEVEL of of output relative to potential capacity that drives inflation, not the growth rate of output.
- Question of inflation and technology. Some have citied that technology is contributing to the weakness of global inflation. Goods and services might be allowed to be more efficient which would keep prices down. We may also see stronger competition through e-commerce which effects how retailers set their prices. This type of disinflation increases everyones purchasing power and therefore is a positive development. The BoC would want to estimate these developments of this trend on inflation, and assuming this is temporary, the BoC would see it through. More work is to be done on size and scale of this development.
- Wage growth. Wage growth has been slower than expected for our economy that’s nearing capacity. Hourly wage growth was up 1.7% in second quarter of 2017. Low wage growth could be a result of high paying oil and gas jobs lost to lower paying jobs in other sectors. Increases to wage growth is an indicator of further economic growth and upward pressure on inflation.
- Elevated household debt. There is reason to think that increasing interest rates will have more of an impact on our economy and inflation, than they have in the past. The BoC also does not know how the macro-prudential measures, aimed at imbalances in the housing market, will effect elevated household debt either. Mortgage rule changes are looming, set to take effect January 2017.
Worthy Points From Speech:
- External risks to bringing economy “home”: Geopolitical development and increasing protectionist sentiment.
- Composition of Canadian exports has significantly changed since the beginning of the oil shock. Newer exports are now: Engineering /technical, travel, financial/management services. Traditional export goods were motor vehicles, which have declined.
- Changes in longer term interest rates influence the Canadian dollar. Our dollar can also change from forces outside Canada, resulting in a change of Canadian inflation.
Stay tuned to future blog posts on what’s happening in Canada’s economy and how this might relate to near term changes in fixed or adjustable interest rates.
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Thank you,
Chad Moore
