Canada Economic Growth Facing Uncertainty

The outlook for Canada’s economy remains uncertain, especially with respect to the direction trade policy south of the border appears to be taking, Bank of Canada Governor Stephen Poloz said.

“We don’t know what sort of alterations to the trade architecture might be in store—and how quickly it might happen,” said Poloz, who was the featured speaker at a lecture hosted by the University of Alberta’s School of Business Tuesday, CBC reported.

The good news, he points out, is that the bank’s forecasting models are able to quantify the impact of shocks to the economy, allowing it to respond accordingly. One of those models, ToTEM, or the Terms-of-Trade Economic Model, helped the bank cushion the blow of the oil price crash by easing interest rates.

“It gave us the confidence to say the oil shock is unambiguously negative and it’s going to throw us off our inflation target so we are acting now before it shows up in the data,” said Poloz. “I really think it helped cushion the blow and speeded up the adjustment process.”

The difficulty today is that there is so much uncertainty around potential changes to existing trade agreements that no economist or model can pinpoint what might happen.

No one knows, for example, how flexible the current construct of global trade really is, or how it might respond to significant policy changes coming from the new US administration.

Canada has already dealt with two significant blows to its economy—the fallout from a high dollar, followed by the oil price shock, which together created an $80-billion hole in the economy. It’s estimated 8,000 to 10,000 businesses disappeared because the high loonie rendered them less competitive.

The prevailing trade uncertainty has added to economic headwinds that include the lag associated with oil-patch investment decisions and the resurgence of export-oriented businesses who could take advantage of the uptick in US economic growth.

As Canada has grappled with the fallout of the oil price crash, discussion on the need to diversify the resource-dependent economy has escalated. In the best of all possible worlds, it would be like Goldilocks’ porridge over a sustained period of time—not too hot, not too cold, just right.