The Bank of Canada held the line on interest rates at its meeting last week. That was no surprise. What did come as a bit of a shock was the highly pessimistic tone of the public statement.
Steven Poloz and his fellow governors are not predicting a recession – at least not yet. But growth projections are being cut yet again. After an anaemic 2018, which saw the GDP expand by just 1.8 per cent, it now looks as if the first half of 2019 will be even weaker than the Bank originally projected.
And it’s not just Canada that is struggling. The entire global economy is slowing down at a faster rate than had been forecast in the January Monetary Report. The Bank said the reasons for this are multiple but specifically singled out trade tensions. Although the release did not say this, these tensions have largely been precipitated by President Donald Trump’s aggressive tariff policies.
“It is clear that global economic prospects would be buoyed by the resolution of trade conflicts,” the Bank stated.
Co-incidentally, the same day the OECD cut its world growth forecast for this year from 3.8 per cent to 3.3 per cent. However, the organization expects U.S. growth to be relatively steady at 2.5 per cent this year and 2 per cent in 2020.
The Bank of Canada said the slowdown in the fourth quarter of 2018 was “sharper and more broadly based” than expected. Consumer spending and the housing market were weak, and exports and business investment fell below expectations.
Although the statement spoke of weaker growth than expected, there was no revised projection of how 2019 will eventually pan out. The Bank decided not to venture out on that limb, saying only “it will take time to gauge the persistence of below-potential growth”.
The consensus among economists now seems to be that there will be no interest rate increases for the rest of 2019.
“Given the high level of household indebtedness, we are in unchartered territory when assessing the impact of rising interest rates on spending,” said Alicia Macdonald, Principal Economist, The Conference Board of Canada.