I'm not sure whether it's me that's starting to sound like a broken record, or whether it's Bank of Canada Governor Stephen Poloz. Once again the Governor has presented a startlingly downbeat view on the Canadian economy, full of fears about deflation, and once again I find myself wondering why he seems so badly out of synch with the rest of the global fraternity of central bankers.
In the US, markets are again trembling at the thought that the Fed might decide to "taper" its quantitative easing program as soon as next week, when the FOMC is set to meet. Recent economic data have been generally upbeat, and the labour market is looking a bit more robust. A move this month would allow Ben Bernanke to take any flak that may fly when the deed is done, while waiting until early in 2014 might allow incoming Fed Chairman Yellen to allay fears that she is too dovish by half. One way or another, the start of the taper is not far away.
Over in London, Bank of England Governor Mark Carney was compelled just last month to amend his much-vaunted "forward guidance" to markets, amid clear signs that the UK recovery is strengthening and deepening. It looks likely that the unemployment rate will fall to 7%, which Carney had earlier identified as a key level for the Bank, some time in 2014, with a tightening move presumably not far behind. This week Gov. Carney has also felt moved to reassure markets that the Bank would act to prevent the housing market from reaching "warp speed". Perhaps Mrs Carney, who famously complained about the cost of housing when the family moved to London at mid-year, has had a word in his ear.
An interesting sideline here, by the way, is that one of the B of E's MPC members, Martin Weale, has expressed doubts about both the forward guidance policy and the significance of a 7% unemployment rate. The uber-confident Carney is not known for tolerating dissent, so Weale can no doubt expect a visit to the woodshed, or worse, in the very near future.
So why are things different in Canada, at least in Gov. Poloz's opinion? His fears of deflation relate mainly to the potential impact of price discounting by retailers, in the face of an invasion by US big box stores (WalMart, Target). There's no doubt this is having an effect: two weeks before Christmas, just about every item in the main department store close by us was discounted by at least 40%. However, the weakening Canadian dollar should mean that this is a short-lived phenomenon.
As for the real economy, the Governor does not see a return to full capacity for another two years, thanks in part to an unexpectedly slow recovery in business investment. Evidently Mark Carney's complaints, when he was at the Bank of Canada, about corporations hoarding "dead money" must have fallen on dead ears -- and it's hard to see how Poloz's incessant doom and gloom musings will loosen up the purse strings.
Most commentators would say that the main risk the Bank faces in pledging to keep rates low is that the housing market could overheat, as everyone from the IMF to Nouriel Roubini has warned. However, it seems that the Bank remains of the view that the excesses in the housing market, and the concomitant rise in household debt, will gradually resolve themselves without any crisis. We shall see.
It's interesting to wonder what the Federal government is making of the new Governor. Until a few months ago, it was a proud boast often heard both from the politicians and former Governor Carney that Canada had weathered the financial crisis and its aftermath much better than any other developed country. It's always seemed likely that the Harper Tories would fight the next election on their economic and fiscal record. If events really do pan out the way Gov Poloz appears to expect, that might not be such a great strategy.
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