The Bank of Canada’s latest “positive” outlook was actually pretty grim

The latest Bank of Canada quarterly report was about the most unenthusiastic upward revision you’ll ever read

Bank of Canada Governor Stephen Poloz

Bank of Canada Governor Stephen Poloz in a press conference, April 13, 2016. (Sean Kilpatrick/CP)

The Bank of Canada raised its outlook for economic growth on April 13. It also provided information that implies interest rates could rise a little earlier than expected, perhaps in early 2017 rather than later in the year. All that sounds positive. But it’s not, really. Canada’s economy still is in trouble.

Let’s start with interest rates. Policy makers opted to leave the benchmark rate unchanged at 0.5%, a quarter point above the lowest on record. The Bank of Canada also released its annual assessment of potential growth, or the maximum speed at which the economy can expand without stoking runaway inflation. The new number is 1.5% through 2018. Estimates of potential are imprecise. Still, the revision is a slap in the face of every person who over the past couple of decades believed balanced budgets, lower taxes and exports to the United States would be enough to secure Canadian prosperity. Canada’s potential growth rate between 2010 and 2014 was 2%, and last year the central bank estimated it was 1.8%. If Canada’s economy was an automobile, it would be a full-sized pickup powered by a 4-cylinder engine.

Economists have been talking about this for years. Canada’s workforce is losing tens of thousands of people to retirement and they aren’t being replaced in equal numbers by new agents of supply and demand. And those who remain are too unproductive to make up the gap. The collapse of business investment that followed the crash of commodity prices last year has only made things worse.

The upshot is that even though Canada’s economy remains weak, the Bank of Canada likely will be forced to raise interest rates sooner than it might have otherwise. The central bank now says the output gap—the difference between the current level of output and the level of output the economy can sustain without triggering inflation—will close earlier than expected, probably in the second half of 2017. Because monetary policy works with a lag, the Bank of Canada likely will have to raise rates early in 2017 to restrain price increases around its target of an annual rate of 2%.

The Bank of Canada now estimates gross domestic product will increase 1.7% this year, compared with an estimate of 1.4% at the start of the year. (It sees growth of 2.3% in 2017 and 2% in 2018.) But it was one of the most unenthusiastic upward revisions of economic growth you ever will read. The Bank of Canada’s best communications device is Governor Stephen Poloz’s statement to the press before he takes reporters’ questions after the release of each quarterly Monetary Policy Report. In his latest statement, the negative outweighed the positive. Poloz noted that the global economy was weaker than it was in January and that investment intentions in the energy industry had deteriorated further. Oil prices are higher, but companies still intend to cut spending by a greater amount than the central bank had estimated earlier. The higher dollar will curb non-energy exports, as will weaker demand from the U.S. The world’s largest economy is still growing moderately, but the profile of that growth has shifted. Canadian exports do well when American businesses are investing and builders are putting up new homes. Both investment and homebuilding have cooled.

“Recent economic data have been encouraging on balance, but also quite variable,” Poloz said. “We have not yet seen concrete evidence of higher investment and strong firm creation. These are some of the ingredients needed for a return to natural, self-sustaining growth with inflation sustainably on target.”

If not for Prime Minister Justin Trudeau’s plan to run deficits to cut taxes and invest in infrastructure, the Bank of Canada likely would have cut interest rates. However, Poloz characterized the government’s spending plan as an unambiguous positive for the economy. Total government spending will contribute 0.5% to economic growth this year and 0.6% in 2017, according to the central bank’s estimates. That will offset weaker trade, which subtract from growth next year, according to the central bank. “The mix of policies we have today is a more favourable one for economic growth than what we had before,” Poloz said during his press conference.

But even when talking about the prospect of the fiscal authority working with him, instead of against him by implementing an arbitrary ceiling spending, Poloz was restrained in his enthusiasm about Canada’s prospects. Trudeau’s economic policies are backed by sound theory, but there is a risk his program won’t boost the economy as much as policy makers hope. Households could save most of the windfall from the tax cuts, or use it to pay debt. The infrastructure money could be delayed or diverted to projects that end up doing little for economic growth.

“It’s not a picture, it’s a movie,” Poloz said of the economy. His point was that we should avoid overanalyzing singular indicators; the effects from the plunge of oil prices are too complex to predict with certainty. He said he believed the movie would have a happy ending, eventually. “It’s a very slow movie,” Poloz said. “It’s one of those very long movies.”