Speaking in Ottawa this morning, Bank of Canada Governor Stephen Poloz said that Canadians should get used to a weak exchange rate and higher inflation.
Can I maybe put that another way? The head man at the nation's central bank is perfectly OK with policies that have reduced Canadians' wealth (the lower exchange rate) and will now systematically erode the value of their incomes (higher inflation). It's a while since I read the Bank's mission statement, but I don't quite recall either of those things being a part of it.
Now, I don't want to put all the blame for the current situation on Gov. Poloz. As he argued this morning, the present exchange rate is largely the result of the weakness in global oil prices: the last time oil was trading at these levels (2002/03), the currency was in the same feeble shape. However, it's hard to suppress the thought that Poloz's regular apocalyptic statements on the economy, coupled with his repeated hints that the Bank may cut interest rates even further, may be making things worse.
Like his predecessor Mark Carney, Poloz seems stunned that the business sector is not using all that almost-free money to boost investment. But if the central bank is talking and acting as if the entire national economy is about to go to hell in a handcart, why should businesses feel any different? What reason do they have for optimism about the future?
To which Poloz would no doubt respond that the lower exchange rate offers all kinds of profitable export opportunities for non-resource companies. In fact, that's what he's counting on to get the economy growing again. So how's that working out? Well, there are some positive signs. Statistics Canada reported this week that Canada's trade deficit narrowed in November, thanks in part to a small rise in exports. Energy exports were unsurprisingly weak, but there was a healthy bounce in manufactured exports, led by a jump in sales of autos and auto parts. Good news, no doubt: but consider that after a currency depreciation of more than 30 percent in the last five years, exports in November were actually slightly below prior-year levels.
Relying on a cheap dollar to boost trade, and relying on trade to boost overall economic growth, doesn't look like a bet with a short term payoff. And in the meantime, the negative effects of low interest rates continue to build. Young couples are borrowing up a storm to get into an increasingly overpriced housing market; older Canadians, finding that their retirement funds are no longer growing, are getting into debt in order to maintain their lifestyles -- personal bankruptcy rates for retirees are now rising faster than those for any other age cohort.
Back when the monetary authorities began using unconventional measures -- zero rates, QE and such -- plenty of people wondered if anyone had a game plan for getting things back to normal when the time came. The US has at least managed to end QE, though it remains to be seen whether the Fed will be able to continue tightening, given the recent ructions in global stock markets. For Canada, it's becoming very difficult to see any palatable way out, short of the kind of sustained US growth that rescued us back in the 1990s.
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