Citing sluggish growth abroad and lower oil prices, the Bank of Canada this morning lowered the overnight lending rate one quarter of a percentage point, to 0.5%.
According to its Monetary Policy Report also released this morning, the Bank projects negative GDP growth of -0.5% for the second quarter of 2015. With the negative growth measured in Q1, that would satisfy the technical definition of a recession.
However, the Bank is projecting a return to growth in the second half of 2015, led by the non-energy sectors of the economy: “Outside the energy-producing regions, consumer confidence remains high and labour markets continue to improve. This will support consumption, which will also receive a fiscal boost” from the rate cut. The bank cites “recent evidence” of a strengthening manufacturing sector, aided by lower energy costs and a lower Canadian dollar.
There is reason to doubt that lower interest rates will close the confidence gap needed for Canadian companies to invest in growth, however, as Canadian Business columnist Kevin Carmichael wrote this morning:
What Canada’s economy needs is a surge in business investment. But the past few years have shown that it will take more than cheap money to coax Canadian executives to leverage their profits to the extent necessary to boost growth. Business leaders are motivated by return on investment, and for whatever reason, too few see opportunities to increase their profits in a wobbly global economy.
The Bank blamed disappointing growth in the global economy for a reduction in Canadian exports, with knock-on effects for the rest of the economy. “Global growth faltered in early 2015, principally in the United States and China…. This has pulled down prices of certain commodities that are important to Canada’s exports.”
In his press conference today, Bank governor Stephen Poloz refused to use the term “recession,” saying only that Canada has experienced what is almost certain to be two consecutive quarters of economic contraction, but declined to attach a label to it.
In response to a question about whether a rate cut amounted to pouring gasoline on the overheated housing market, Poloz said “We admit that these conditions are likely to cause financial imbalances,” in some cases, but that the Bank’s primary goal is to ameliorate the “financial shock” to the economy caused by the drop in oil prices. That echoes Carmichael’s earlier column explaining Poloz’s priorities:
If debt is a problem, the easiest way to deflate it would be to raise interest rates. But for Poloz, that would be attacking a symptom of the post-crisis malaise, rather than the cause, which in his view is weak exports and business spending.