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World economy faces risks, but growth likely: Bank of Canada

Allison Lampert
09:58 EST Wednesday, May 11, 2016

MONTREAL — While the global economy faces a number of risks, including the potential for a shock from China, the most likely scenario is that growth continues, with some headwinds starting to slowly fade, a senior Bank of Canada official said on Wednesday.
Nonetheless, the world economy’s potential growth will be lower than it was 10 years ago, partly due to demographic shifts that policy cannot fully address in the short term, Senior Deputy Governor Carolyn Wilkins said.
“There are a lot of downside risks, but I would say though that the most likely thing is that the economy is going to keep growing,” Wilkins told a panel.
“There’s not the typical inflation pressures you see that would result in very abrupt increases in interest rates and that’s often what triggers downturns.”
The Bank of Canada cut interest rates twice last year to cushion the shock of cheaper oil. While the bank is expected to hold steady when it meets later this month, odds of another cut this year have risen following disappointing trade data and oil production disruptions due to wildfires in Alberta.
One risk the Bank of Canada thinks about is the potential for a shock out of China, which affects Canada not only through demand for exports but also the effect China has on commodity prices, Wilkins said.
While the central bank expects China will experience slower but more sustainable growth, the risks are “pretty important,” she said.
But there are signs that some headwinds facing the global economy are dissipating, Wilkins said, pointing to the U.S. recovery.
“It’s not going to go in a straight line but we see it recovering,” Wilkins said. A stronger U.S. economy is key for Canada’s export outlook.
“I think the focus is on the downside risks because there just seem to be so many of them and we try to take some of those on board so we have a balanced forecast,” Wilkins added.
With the potential for world economic growth lower, the neutral interest rate is also going to be lower and is in the range of 2.75 to 3.75 percent for Canada, Wilkins said.

Fed keeps rates unchanged, signals faith in U.S. economy

Lindsay Dunsmuir and Jason Lange
14:04 EST Wednesday, Apr 27, 2016

WASHINGTON — The Federal Reserve kept interest rates unchanged on Wednesday but signaled confidence in the U.S. economic outlook, leaving the door open to a hike in June.
The U.S. central bank’s policy-setting committee said the labor market had improved further despite a recent economic slowdown and that it was keeping a close eye on inflation.
It added that global economic headwinds remained on its radar, but removed a specific reference from its last policy statement to the risks they posed.
“The committee continues to closely monitor inflation indicators and global economic and financial developments,” the Fed said in a statement following a two-day meeting.
It kept the target range for its overnight lending rate in a range of 0.25 per cent to 0.50 per cent. The Fed hiked rates in December for the first time in nearly a decade.
For the third consecutive meeting, it did not include any mention of the balance of risks to the economy. However, the Fed noted that while growth in household spending had moderated, households’ real income had risen at a “solid rate” and consumer sentiment remained high.
Inflation has picked up recently, but the Fed on Wednesday said it was expected to remain low in the near term in part because of earlier declines in energy prices. It added that it remained confident inflation would rise to its 2 per cent target over the medium term.
Despite strong job gains and an unemployment rate of 4.9 per cent, Fed policymakers have previously said they would proceed cautiously in raising rates again due to the uncertainty in the world economy and a lack of inflation pressures at home.
A global equities sell-off and the tightening of financial markets earlier this year largely on concerns of a slowdown in China prompted the Fed’s policy-setting committee last month to dial back rate hike expectations for the year.
Fed policymakers currently project two rate hikes in 2016, compared to the four hikes forecast in December. Stocks have continued to rise since the Fed’s March policy meeting and investors’ nerves have been soothed by an apparent pick-up in China’s economy.
Oil prices also have rallied from a near-collapse earlier this year and the U.S. dollar has shed some of its strength from last year. A robust dollar last year acted as a drag on U.S. manufacturing and other sectors in the economy.
Other major central banks have been grappling with ways to deal with lackluster economies, including the adoption of negative interest rates.
For its part, the Fed is concerned that with interest rates still close to zero it would have to rely on more unconventional policy tools should the economy take a turn for the worse.
An initial estimate of U.S. first-quarter gross domestic product is expected on Thursday to show tepid growth. Kansas City Fed President Esther George dissented for the second consecutive meeting.

Poloz sets high bar for another Bank of Canada rate cut

BARRIE McKENNA
08:47 EST Tuesday, Apr 26, 2016

OTTAWA — Bank of Canada Governor Stephen Poloz has set a high bar for cutting interest rates again.
It would take a “shock of some significance” – such as another economic setback in the United States or China – for the central bank to consider more rate relief, Mr. Poloz said Tuesday.
The bank cut its overnight rate twice last year after the global commodities price crash, which has decimated jobs and investment in Canada’s oil patch. But the rate has been fixed at 0.5 per cent since last July in spite of further deterioration in both the Canadian and global economies.
The new Liberal government’s move in its March budget to invest $25-billion in infrastructure and families over two years “more than offset” the renewed downward pressure on the economy, according to Mr. Poloz. In its April monetary policy report, the bank estimated that federal stimulus would boost gross domestic product by 0.5 percentage points this year and 0.6 points in 2017.
Canada’s top central banker said it would take a major delay in getting the economy back to full capacity for the bank to revert to an easing bias on rates. Those shocks could include a major slowdown in the global economy brought on by weaker growth in China or the U.S., Canada’s largest trading partner.
“It would be another negative shock but it would need to be obviously a shock which is of some significance or an accumulation of other shocks,” Mr. Poloz told reporters after a speech to Wall Street financial professionals in New York.
He was quick to point out that either of these scenarios are built into the bank’s current forecast. “Those are just shocks that economists think about,” he explained.
Mr. Poloz said he expects the Canadian economy to get up to “full speed this year.” But he cautioned that it will take another full year or more for the economy to absorb any “excess capacity,” including laid-off workers and idled plant production.
Canada is “fortunate” that the federal government is spending money on fiscal stimulus because it balances out the waning impact of monetary policy, he pointed out.
Mr. Poloz dedicated most of his speech to explaining a troubling drop-off in global trade growth since the 2008-09 financial crisis.
He warned that trade growth around the world is unlikely to regain the torrid pace of the years before the global financial crisis. The days of 7-per-cent annual growth in international trade are gone, perhaps for good, Mr. Poloz said.
“The rapid pace of trade growth that prevailed in the two decades before the crisis was the exception, and not the rule,” Mr. Poloz argued.
That’s because much of the slowdown is due to the end of a long period of global integration – as multinationals specialized and built global supply chains, countries formed powerful new trading blocs and China joined the global economy.
“The big opportunities for increased international integration have been largely exploited,” Mr. Poloz explained. “China can join the [World Trade Organization] only once.”
Mr. Poloz nonetheless put a positive spin on the outlook for trade. Roughly half the post-crisis slowdown in trade is due to cyclical economic weakness, particularly lower business investment, most of which will be reversed.
“The weakness in trade we’ve seen is not a warning of an impending recession,” he said. “Rather, I see it as a sign that trade has reached a new balance point in the global economy, and one that we have the ability to nudge forward.”
Some analysts said his comments suggest Mr. Poloz remains a trade optimist. He could have said Canadian exports will remain volatile, Bank of Nova Scotia economists Derek Holt and Dov Zigler said in a research note. “Instead, [he] walked on the sunnier side of the street.”
Countries can bolster trade by striking new free-trade agreements, such as the Trans-Pacific Partnership, and boosting productivity, according to Mr. Poloz. Other sources of trade growth will come from the emergence of new, more productive companies – a process that has already begun, he added.

Global trade unlikely to return to pre-crisis levels, Poloz warns

BARRIE McKENNA
08:47 EST Tuesday, Apr 26, 2016

OTTAWA —
• Global trade slowdown may be permanent
• Two decades of unprecedented global integration is ending
• Low interest rates from central banks are working; it’s just that economic “headwinds” remain strong
The long-awaited rebound in global trade isn’t just delayed. It may never come.
Trade growth around the world is unlikely to regain the torrid pace of the years before the global financial crisis, Bank of Canada Governor Stephen Poloz warned Tuesday in New York.
That means the days of 7-per-cent annual growth in international trade are gone, perhaps for good, Mr. Poloz said in remarks prepared for a speech to Wall Street financial professionals.
“The rapid pace of trade growth that prevailed in the two decades before the crisis was the exception, and not the rule,” Mr. Poloz argued.
Major gains from global integration are in the rear-view mirror
That’s because much of the slowdown is due to the end of a long period of global integration – as multinationals specialized and built global supply chains, countries formed powerful new trading blocs and China joined the global economy.
“The big opportunities for increased international integration have been largely exploited,” Mr. Poloz explained. “China can join the [World Trade Organization] only once.”
Mr. Poloz also issued a vigorous defence of the actions of central banks around the world since the financial crisis – most notably, the steady diet of ultra-low interest rates.
“The idea that monetary policy just isn’t working any more [is] one myth I’d like to dispel right off the top,” he insisted.
Higher central bank interest rates might trigger recession
“If you think monetary policy is not working, ask yourself what would happen if interest rates suddenly returned to 3 or 4 per cent. Most would agree that such a move would trigger a recession.”
Fears that monetary policy has become impotent has triggered financial market volatility, he said.
The underlying problem, Mr. Poloz suggested, is that “strong headwinds” continue to buffet the global economy, masking the effects of interest rate relief, which has “saved us from the worst.”
The Bank of Canada cut its key interest twice last year to just 0.5 per cent, following the commodities price collapse. The bank has, at times, faced pressure to cut again, but has so far resisted.
Mr. Poloz dedicated most of his speech to what he called “the striking weakness of international trade.”
Global trade has reached a new “balance point”
Roughly half the post-crisis slowdown in trade is due to economic weakness, particularly lower business investment, he said. And that will eventually recover.
But the rest of the trade slump is due to structural factors that won’t quickly fade, such as China’s transition to slower, consumption-led growth.
The potential for more global economic integration in the years ahead is limited, he said, and that will inhibit productivity and GDP growth.
“The weakness in trade we’ve seen is not a warning of an impending recession,” he said. “Rather, I see it as a sign that trade has reached a new balance point in the global economy, and one that we have the ability to nudge forward.”
Countries can do that by striking new free trade agreements, such as the Trans Pacific Partnership, and boosting productivity, according to Mr. Poloz.

Bank of Canada’s Poloz more optimistic about global economy

Andrea Hopkins
18:59 EST Friday, Apr 15, 2016

WASHINGTON — Bank of Canada Governor Stephen Poloz said on Friday that he was more encouraged about the state of the global economy after hearing from his G20 colleagues at the spring meeting of the group than he was heading into the discussions.
In holding key overnight rates steady this week, the Bank of Canada said in its Monetary Policy Report that weaker global growth was one of the biggest downside risks to Canada’s export-driven economy.
“I think compared to when we were in Shanghai (in February), people were in a more positive frame and I think that has partly to do with markets having gone into a slightly calmer phase, but also some better numbers have come in,” Poloz told reporters in a joint news conference with Finance Minister Bill Morneau, noting that China’s first-quarter data was in line with expectations.
“That is the kind of thing that is reassuring. So I come away feeling a little bit more encouraged, I would say, than when I arrived,” he said.
Morneau agreed that the “tone and tenor” from colleagues around the table was better than two months earlier at the Shanghai meeting.
Noting the divergence in inflation risk between the United States and Canada, Poloz said the risk of an overshoot in inflation is “pretty far away” for Canada and that the U.S. economy is “quite a bit ahead of us.”
While investors expect the U.S. Federal Reserve to raise rates later this year, Canada could hold official interest rates at 0.50 per cent – near a historic low – into 2017.
Poloz also dismissed the suggestion that a recent rise in the price of oil to about $40 (U.S.) a barrel from $30 a barrel previously was a bad thing for the Canadian economy because it could make exports less competitive by helping to push up the value of the Canadian dollar.
“A drop in oil prices is unambiguously negative for the Canadian economy, all things considered,” Poloz said.
He also said that global central banks still have tools to ease monetary policy if needed.
“There is pretty general agreement amongst the central bankers that we all have ammo, as you put it, we have room to manoeuvre. I guess it is fair to say we’ve discovered we have more room to manoeuvre than we thought we had five years ago in the way of the financial crisis,” Poloz said.


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