The Canadian economy is approaching a tipping point amid improved confidence among businesses and signs of stronger foreign demand, Bank of Canada governor Stephen Poloz said Wednesday.
“The bank expects that strong increases in U.S. business and residential investment will particularly benefit the sectors of Canada’s export market that have lagged so far, notably machinery and equipment and wood products,” Poloz said according to remarks prepared for a speech at the Vancouver Board of Trade.
However, Poloz added that the Canadian economy should be able to support stronger growth without stoking inflation — the key factor on the central bank’s interest rate decisions.
The Bank of Canada has maintained its influential overnight interest rate at one per cent since September 2010, although it has indicated that the rate will go up at some time.
However, with Canada’s inflation rate near the low-end of the central bank’s target range of between one and three per cent — ideally close to two per cent — economists have said Poloz isn’t under pressure to hike the key rate.
“When the bubble burst in 2008, we were left with a crater, which is where we now find ourselves,” he said.
“If you look carefully at a pot of simmering spaghetti sauce, under every bubble there is a crater that’s equal in size. So a seven-year bubble, a seven-year crater. Central banks have been filling that crater with liquidity, so we can row our boats across it. We need to make sure we’re getting to shore and not just hitting a rock.”
He noted that Canadian businesses have so far been cautious about investing until they see more concrete signs of stronger demand, but he observed that recent surveys have suggested business sentiment has shown some improvement and he’s watching closely to see if the trend continues.
“The bank’s interviews with Canadian business leaders for our autumn Business Outlook Survey are being conducted right now,” he said.
“I am looking forward to learning about their views and perspectives — and if and how they may be changing.”
Poloz was buoyed by the sign that the number of Canadian companies was growing, something that was stagnant in the wake of the financial crisis and recession.
He said there were some 40,000 more firms with at least one employee than there were this time last year and the pace of growth was stronger than would be expected in normal, non-recessionary times.
Poloz also said long-term interest rates have recently begun to return to more normal levels, consistent with a strengthening of the U.S. economy and expectations are the U.S. Federal Reserve will start slowing its extraordinary monetary stimulus, signs the underlying momentum of the U.S. economy is expected to hold.
Canadian economic growth is expected to pick up in the third quarter following a weaker-than-expected second quarter that was hit by flooding in Alberta and a construction strike in Quebec.
In its July monetary policy report, the bank forecast growth averaging 1.8 per cent this year thanks to a stronger first quarter. It sees growth of 2.7 per cent in 2014 and 2015.