The sluggish global economy has taken its toll on Canada’s export sector, said Bank of Canada Governor Stephen Poloz during a speech today in Toronto.
The BoC’s studied more than 2,000 categories of underperforming non-energy exports, he adds, and found about a quarter of those saw shipments fall by more than 75% between 2000 and 2014.
And that’s created a shortfall of about $30 billion, relative to the historical norm for earnings. It’s also had a major impact on job creation in Canada.
Still, the BoC’s monetary policy will help push Canadian inflation toward the bank’s 2% target, even as worldwide economic uncertainty lingers, says Poloz.
In his speech, he reflected on the fact that the global economy is facing significant headwinds that could restrain growth for a while to come, despite efforts by households, financial institutions and governments to reduce debt.
“Probably the most important [hurdle] is lingering uncertainty about the future, whether from geopolitical developments, market volatility, or just the trauma that companies have been through,” he notes.
But “we are confident that these headwinds will dissipate in time. In the meantime, interest rates will remain lower than in the past in order to work against those forces.”
During this time, the BoC will continue to adopt a risk-management approach when it comes to policy decision-making, says Poloz. Going forward, key variables such as growth, inflation, the output gap and the neutral rate of interest will be monitored when the bank makes policy decisions.
In coming years, he hopes for a sustained expansion of Canada’s export sector that supports a spike in demand, as well as a rebuilding of our business cycle. If that occurs, there would be “increased business investment [that] would create new supply and new jobs. This virtuous cycle would continue until the excess capacity in the labour market is reabsorbed,” says Poloz.
He concedes that depressing interest rates over the long term can be risky, but also notes, “If the policy interest rate had been at 3.5% in both Canada and the U.S. since the beginning of 2011, Canada’s unemployment rate would [likely have been] % higher today, and core inflation would be well below 1%.”
In his view, the BoC’s “primary job is to pursue [its] 2% inflation target with a degree of flexibility around the time horizon of [that] achievement.”