Staying low

Might we just have seen evidence that the Bank of Canada's low rates/low dollar policy is starting to pay off?

Speaking in Quebec City yesterday, Bank of Canada Governor Stephen Poloz made it very clear that low interest rates are here to stay. The title of his presentation -- "Living with lower for longer" -- says it all.  The Bank believes that the reduced potential growth rate of the economy -- perhaps as little as 1.5 percent annually -- must condition not only its own policy approach, but also the way Canadians manage their own finances.  A lower growth rate means that the "normal" level of interest rates must be lower than in the past.  That in turn means that Canadians saving and investing for their retirement need to put more money aside.

The Bank remains convinced that the fiscal stimulus measures initiated by the Trudeau government will boost GDP in the second half of this year and beyond, but it evidently sees that interest rates and the exchange rate will need to remain near current levels for a prolonged period.  Bay Street economists' forecasts for when the Bank may start to raise rates are being steadily pushed back, with at least one -- my old shop at TD -- seeing no move before 2019.  

Until recently, there has been little evidence that the low dollar has been doing much to boost the economy.  Employment in the manufacturing sector has continued to shrink, albeit more slowly than before.  However, the new contract agreement reached this week between General Motors and its main union, Unifor (the former CAW) might just suggest that things are changing.  GM's venerable manufacturing plant at Oshawa, Ontario, has long been seen as vulnerable to closure, but the new agreement will see The General investing heavily to continue vehicle assembly there after current model runs conclude in 2019.

What's more, GM will be returning some engine assembly work from Mexico to its St Catharines Powertrain plant right here in Niagara. After years of seeing work flow in the opposite direction, Unifor is right to see this as a triumph.  There have of course been concessions on the union's part, with the defined benefit plans that the auto industry once offered now receding in the rear-view mirror.  Regrettable as this may be, the union is undoubtedly correct in seeing that GM jobs with less-desirable pensions are better than no GM jobs at all.

The union is claiming a big victory here, and vindication of its seemingly risky strategy of targeting GM (rather than Ford or Chrysler) for the pattern-setting first negotiation.  Fair enough -- but it's surely true that GM would have been a much tougher nut to crack if its management did not believe that the low Canadian dollar would be around for many years to come.  Yesterday's speech by Gov Poloz shows that to be a pretty safe bet.