Some of the dials on Bank of Canada Governor Stephen Poloz’s dashboard are starting to tilt in the right direction.
Statistics Canada reported March 2 that gross domestic product grew three per cent in 2017, the most since 2011 and double the previous year’s mark.
That excellent headline won’t interest Poloz much.
These days, the governor is into granular data. On its own, last year’s growth rate suggests the central bank is in danger of losing its grip on inflation: three per cent is about twice as fast as policy makers reckon the economy can grow without stoking prices.
But Poloz has decided to tempt fate. Based in part on the recent experience of the U.S. Federal Reserve, he thinks finer indicators such as wages and business investment suggest he can get away with allowing the economy to run a little hot. So, with their second interest rate announcement of 2018 scheduled for next week, Poloz and his closest advisers will again be digging deep into the latest data. They will probably like a lot of what they see.
A key measure for Poloz is wages.
Canada has been on a hiring binge for more than a year, but employers were reluctant to boost salaries. That’s starting to change. StatCan’s latest GDP figures show companies’ expenditures on what they pay their employees rose 4.9 per cent in the fourth quarter from a year earlier, the biggest increase since 2011.
The Bank of Canada prefers its own composite measure of various pay indicators, but as Toronto-Dominion Bank economist Brian DePratto noted, the “wages and salaries” tally from the quarterly GDP report has the biggest influence on the Bank of Canada’s wage indicator. The economy is nearing full employment, if it isn’t there already, and that’s forcing employers to pay more to get the workers they need to keep up with demand.
Another key for Poloz is business investment.
That dial was disconcertingly dead in 2015 and 2016, as the collapse of oil prices prompted companies to bail on plans to develop new bitumen projects. Finally, ultra-low interest rates and stronger global economic growth stirred the animal spirits of Canadian executives last year. Business investment increased 2.3 per cent over the final three months of 2017, the biggest quarterly gain since 2012. Spending on machinery and equipment jumped three per cent, a decent move by historical standards, suggesting that companies are retooling to take advantage of the strongest global economic growth since the initial rebound from the Great Recession.
These data suggest the Bank of Canada will raise interest rates again this year. They aren’t strong enough to give a clear indication of when, however. Higher wages and increased investment are encouraging, but there’s reason to worry that the economy lacks the momentum needed to push through the headwinds being whipped up by U.S. President Donald Trump.
Canada’s economy had a good year in 2017; it beat the other Group of Seven economies thanks to an excellent start, but momentum faded considerably over the second half. GDP grew at an annual rate of 1.7 per cent in the fourth quarter, much slower than the 2.5-per-cent pace the Bank of Canada predicted in January. That means the economy is back in line with what the central bank considers its non-inflationary speed limit, reducing the pressure on policy makers to lift borrowing costs.
Households curbed their spending somewhat over the final few months of 2017, something the central bank has been predicting would happen, as so much of their purchasing in recent years has been done on credit. Unfortunately, it’s still unclear whether other economic actors will pick up the slack.
Exporters were supposed to take over, but they still haven’t recovered their pre-crisis swagger. International shipments of goods and services grew only one per cent in 2017, matching the previous year’s disappointing performance. That’s not what you’d expect from a country that thinks of itself as a “trading nation.” For whatever reason, Canada failed to take full advantage of the upsurge in global economic growth last year, as the world’s trade in goods expanded in excess of three per cent last year, according to the World Trade Organization.
Increased business investment suggests Canada could do better this year. But that could depend on how executives react to Trump, who appears bent on upending the norms of global trade. His declaration Thursday that he will implement tariffs on imports of steel and aluminum was met with promises of retaliation from virtually all of the U.S.’s major trading partners. Trump appeared to relish the prospect of conflict, tweeting that “trade wars are good, and easy to win.”
Domestic producers shipped more than $11 billion worth of aluminum to the U.S. in 2017, and more than $7 billion of iron and steel. Canada could end up with an exemption, but the episode is nonetheless a reminder of how vulnerable we are to Trump’s capriciousness.
The central bank said in January that foreign direct investment was less than one would expect for an advanced economy that was expanding at an annual rate of around three per cent. A separate StatCan report this week supports that conclusion. International companies invested about $34 billion in Canada last year, the lowest amount since 2010. The country attracted no new investment at all from abroad in the fourth quarter; the $8 billion that foreign entities spent was generated entirely from existing operations.
Uncertainty over trade and the Trump’s corporate tax cuts at the end of last year hurt competitiveness. Finance Minister Bill Morneau opted against doing anything about it this week’s budget. That means the Bank of Canada has little choice but to leave interest rates low, no matter what the other gauges on its dashboard might be saying.
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