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The Bank of Canada (BoC) released its latest Monetary Policy Report (MPR) last Wednesday and left its policy rate unchanged at 0.50%, as was universally expected.
I always read the MPR with great interest because it gives us the BoC’s views on the state of the world’s economies and includes projections for where the Bank sees foreign and domestic economic growth headed over the next several years.
Here is a summary of the highlights from the latest MPR, with my accompanying comments:
- “Global economic growth remains modest as the world economy is undergoing significant shifts”. Lots of “shifts” to choose from here: the spiking U.S. dollar, China’s slowing growth, lower oil prices, geopolitical instability in the Middle East and Africa.
- The BoC lowered its global-growth forecasts from 2015 through to 2017. It noted that while monetary-policy easing and cheaper oil prices were supporting global growth momentum, the fundamental elements required to make this momentum more sustainable were still wanting. Specifically, the Bank referred to “persistent weakness” in business investment and the “slow progress” of Europe and Japan in implementing much-needed structural reforms.
- “The U.S. economy is in a solid expansion, and the recovery is gradually progressing in other advanced economies”. The BoC now sounds more confident about the sustainability of the U.S. recovery, highlighting its “robust growth in private demand”, while its observation that recoveries in other countries are only “gradually progressing” is a tepid endorsement at best.
- The Bank notes that “growth prospects have softened in a number of emerging-market economies (EMEs)” that the Bank credits with being “the main engine of global growth over the past several years”. This was a candid acknowledgement of the importance of EMEs and it raises a real concern about where we will find new sources of momentum now that this “main engine of global growth” is showing signs of slowing.
- China “continues to undergo a major structural transition” as it shifts its economic focus away from infrastructure investment and exports, and towards the domestic consumer instead. The BoC seems confident that China will implement the structural reforms needed to facilitate this transition, but it still downgraded its Chinese GDP growth forecast to just over 6% for 2016 and 2017. This was an acknowledgement that China’s “significant” housing-market correction would keep construction activity “more subdued” than was anticipated in the BoC’s July projections. That said, 6% GDP growth is still the envy of the developed world and the BoC notes that “China’s demand for raw materials continues to expand”. Although it is seldom remembered or taken into account, after China’s many years of 10%+ growth, China is now expanding a much larger economic base, as the second largest economy in the world. So while China’s growth rate is slowing, its overall level of economic demand still gives the global economy important and much-needed momentum.
- The BoC gave a tip of the hat to India where it predicted that growth “which has averaged close to seven percent over the past two years, should strengthen further”. India is the one country with the population size and sheer scope to create a new economic miracle that would rival China’s recent history. If Indian growth continues to accelerate it could underpin a new commodity super-cycle that would provide a powerful tailwind to commodity-based economies like ours.