Resistance is futile

Today's report that the Canadian economy shed 6400 jobs in June makes a further rate cut all but inevitable, and it's unlikely that Bank of Canada Governor Stephen Poloz will resist the pressure to cut for very long. Truth to tell, mind you, if you look beyond the headline number, today's report is not that bad -- there was a healthy surge in full-time employment, and the overall decline in jobs was produced entirely by a sharp fall in part-time positions.

That full time/part time breakdown needs to be treated with caution in view of the extreme volatility that those series have shown for the past year and more, but in any case, the fall in aggregate employment adds to the impression of renewed economic weakness that has formed in the last week or two. The news of a further small decline in GDP in April has economists openly questioning Poloz's view that the weakness caused by the decline in oil prices might be almost over. A number of forecasters think that the economy is already in a technical recession -- two consecutive quarters of declining output -- and are calling on Poloz to provide further monetary policy support.

Delightfully, just about the only person adamant that there is and will be no recession is Federal Finance Minister Joe Oliver. With the election now just over three months away, the Tories are seeing one of their main bragging points, their supposedly excellent stewardship of the economy, looking increasingly tattered. What a shame!

As anyone who has followed my regular rants about the Bank of Canada under Gov Poloz will know, the question that should be asked about a further rate cut is, will it do more harm than good? Indeed, will it do any good at all?  Canada's latest monthly trade data showed a horrific deficit, with no sign that non-oil exports are expanding to offset the fall in energy shipments. Rather the reverse, in fact: manufacturing exports remain weak, despite the supposed triple booster of low interest rates, a weak exchange rate and a strongly growing US economy. This is no surprise to those of us who think that the Canadian economy's problems are structural rather than cyclical, but it seems to be news to the Bank of Canada.  

And the potential harm from a rate cut? Canadian households are more in debt than ever, and housing prices in the major metropolitan markets grow ever less affordable. A rate cut now will only add to those imbalances, piling up debt to levels that will quickly become unaffordable when rates start to rise. The ugly paradox is that the more Gov Poloz cuts rates now, the more harder he makes it to raise rates at any point in the future without steering the economy straight into the ditch.