Bank of Canada Cuts Growth Forecast

[Toro]

BoC cuts growth outlook to 2.9%

By HEATHER SCOFFIELD AND TAVIA GRANT

Thursday, October 20, 2005 Posted at 1:10 PM EDT

Globe and Mail Update

The Bank of Canada has slashed its Canadian growth forecast for next year to 2.9 per cent from 3.3 per cent, partly because lacklustre productivity has taken a bite out of the country's economic potential.

In a newly negative tone, the monetary policy report also warned of the growing chance of “an abrupt and disorderly adjustment” to global imbalances of supply and demand — an adjustment that would cut demand for Canadian goods.

The bank pointed to slow productivity growth, the strong Canadian dollar, high energy prices and competition from Asia as the reasons behind the lower forecast. The Bank of Canada said growth should pick up to 3 per cent by 2007.

The bank reiterated that the economy is growing as fast as it can without over-heating right now, and interest rates will likely have to climb somewhat to keep inflation at bay. The central bank raised its key lending rate on Tuesday for the second time in as many months.

Rates won't rise indefinitely however, economists said.

“The bank's downgrading of growth in 2006, and its concerns that the risks stemming from global imbalances in 2007 and beyond are to the downside, might otherwise suggest that the bank will not be willing to push rates anywhere beyond what it believes is to be a neutral level,” said Carl Gomez, an economist at TD Securities Inc. in a note.

While the risks to the short-term forecasts are balanced, the bank report was laden with warnings that the long-term future is fraught with risks.

“Looking to 2007 and beyond, there are risks related to the manner in which global imbalances will be unwound,” the bank said, adding that the longer they persist without policy action, the higher the risk of global demand buckling.

A principal risk is that if low household and government savings rates in the U.S. begin to rise, suggesting consumers are spending less, and domestic demand in other countries doesn't increase to offset that, then Canadian exporters will begin to feel the pinch.

Moreover, high oil prices are tilting current account surpluses towards oil-exporting countries, which may further dampen global demand, the bank said.

“U.S. consumers and governments need to spend less and save more, and policy action needs to be taken elsewhere to encourage stronger domestic demand,” the report said.

Any “disorderly adjustment” would likely involve large movement in exchange rates and other asset prices and a sharp slowing in the world economy. A sharp decline in the U.S. dollar against the Canadian dollar would further weaken demand for Canadian products, the report said. “Such weaker demand would have implications for the conduct of monetary policy,” it said.

In making its projections, the central bank assumes a trading range for the loonie of between 84 cents (U.S.) and 86 cents — up from its previous assumption in July of between 79 cents and 83 cents. The Canadian currency is currently trading at 85.21 cents.

While pressures on consumer prices are “somewhat stronger” than in the bank's July report, it doesn't expect higher energy prices to push up the core rate of inflation. The bank predicted core inflation, which excludes energy prices, will remain below 2 per cent in coming months.

The bank expects the core rate to return to 2 per cent by mid-2006.

The central bank reiterated that further rate hikes are on the horizon as the economy is operating at full capacity. “Some further reduction of monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters, and to keep inflation on target,” the bank said.

The bank said that every $10 (U.S.)-a-barrel increase in the price of oil shaves 0.1 per cent off the gross domestic product over one year. Over three years however, it adds 0.1 per cent to economic growth.

http://www.theglobeandmail.com/servlet/sto...Story/Business/

[tml12]

BoC cuts growth outlook to 2.9%

By HEATHER SCOFFIELD AND TAVIA GRANT

Thursday, October 20, 2005 Posted at 1:10 PM EDT

Globe and Mail Update

The Bank of Canada has slashed its Canadian growth forecast for next year to 2.9 per cent from 3.3 per cent, partly because lacklustre productivity has taken a bite out of the country's economic potential.

In a newly negative tone, the monetary policy report also warned of the growing chance of “an abrupt and disorderly adjustment” to global imbalances of supply and demand — an adjustment that would cut demand for Canadian goods.

The bank pointed to slow productivity growth, the strong Canadian dollar, high energy prices and competition from Asia as the reasons behind the lower forecast. The Bank of Canada said growth should pick up to 3 per cent by 2007.

The bank reiterated that the economy is growing as fast as it can without over-heating right now, and interest rates will likely have to climb somewhat to keep inflation at bay. The central bank raised its key lending rate on Tuesday for the second time in as many months.

Rates won't rise indefinitely however, economists said.

“The bank's downgrading of growth in 2006, and its concerns that the risks stemming from global imbalances in 2007 and beyond are to the downside, might otherwise suggest that the bank will not be willing to push rates anywhere beyond what it believes is to be a neutral level,” said Carl Gomez, an economist at TD Securities Inc. in a note.

While the risks to the short-term forecasts are balanced, the bank report was laden with warnings that the long-term future is fraught with risks.

“Looking to 2007 and beyond, there are risks related to the manner in which global imbalances will be unwound,” the bank said, adding that the longer they persist without policy action, the higher the risk of global demand buckling.

A principal risk is that if low household and government savings rates in the U.S. begin to rise, suggesting consumers are spending less, and domestic demand in other countries doesn't increase to offset that, then Canadian exporters will begin to feel the pinch.

Moreover, high oil prices are tilting current account surpluses towards oil-exporting countries, which may further dampen global demand, the bank said.

“U.S. consumers and governments need to spend less and save more, and policy action needs to be taken elsewhere to encourage stronger domestic demand,” the report said.

Any “disorderly adjustment” would likely involve large movement in exchange rates and other asset prices and a sharp slowing in the world economy. A sharp decline in the U.S. dollar against the Canadian dollar would further weaken demand for Canadian products, the report said. “Such weaker demand would have implications for the conduct of monetary policy,” it said.

In making its projections, the central bank assumes a trading range for the loonie of between 84 cents (U.S.) and 86 cents — up from its previous assumption in July of between 79 cents and 83 cents. The Canadian currency is currently trading at 85.21 cents.

While pressures on consumer prices are “somewhat stronger” than in the bank's July report, it doesn't expect higher energy prices to push up the core rate of inflation. The bank predicted core inflation, which excludes energy prices, will remain below 2 per cent in coming months.

The bank expects the core rate to return to 2 per cent by mid-2006.

The central bank reiterated that further rate hikes are on the horizon as the economy is operating at full capacity. “Some further reduction of monetary stimulus will be required to maintain a balance between aggregate supply and demand over the next four to six quarters, and to keep inflation on target,” the bank said.

The bank said that every $10 (U.S.)-a-barrel increase in the price of oil shaves 0.1 per cent off the gross domestic product over one year. Over three years however, it adds 0.1 per cent to economic growth.

http://www.theglobeandmail.com/servlet/sto...Story/Business/

<{POST_SNAPBACK}>

North America needs leadership and she needs it badly.

[Yaro]

The BoC is a private institution looking after its own needs as it always has and always will. If TCT or BoM came out with a similar report would anyone take it seriously?

[Toro]

The BoC is a private institution looking after its own needs as it always has and always will. If TCT or BoM came out with a similar report would anyone take it seriously?

<{POST_SNAPBACK}>

What?

[Yaro]

What?

Your going to have to be more specific?

[Toro]

What do you mean?

[Yaro]

What is part of a question....

[Toro]

Hmmmmm...

The BofC is not a private institution. Its a part of the government of Canada.

It makes forecasts. This is their forecast.

If BMO has a reputable economics group, then why wouldn't you take it seriously?

The BofC also make very poignant points about Canada's productivity and the imbalances in the global economy. In fact, the clarity of the statements about the imbalances is quite unusual for a central bank. It is implicitly somewhat criticizing the handling of monetary and fiscal policy in the US. I agree.

[August1991]

The BoC is a private institution looking after its own needs as it always has and always will. If TCT or BoM came out with a similar report would anyone take it seriously?

<{POST_SNAPBACK}>

Yaro, your comment perplexes me too. The Bank of Canada, in theory, is an independent institution of government. In theory, its 'own needs' are to maintain low inflation.

----

I fear that by this report, the Bank of Canada is sending a signal that it may delay raising interest rates. IMV, the Bank of Canada should not try to steer the economy.

[Yaro]

The BofC is not a private institution. Its a part of the government of Canada.

It makes forecasts. This is their forecast.

If BMO has a reputable economics group, then why wouldn't you take it seriously?

The BoFC is a private bank, it kind of disturbs me that you don't know this...

The BofC also make very poignant points about Canada's productivity and the imbalances in the global economy. In fact, the clarity of the statements about the imbalances is quite unusual for a central bank. It is implicitly somewhat criticizing the handling of monetary and fiscal policy in the US. I agree.

So long as Canada like the US is the home of such a high concentration of the worlds investor population labour will never fall to a level where productivity parity with Asia is even remotely possible. Talking about productivity in the current enviorment is pointless, parity is impossible.

[Toro]

The BoFC is a private bank, it kind of disturbs me that you don't know this...

Er, Yaro

The Bank was founded in 1934 as a privately owned corporation. In 1938, it became a Crown corporation belonging to the federal government. Since that time, the Minister of Finance has held the entire share capital issued by the Bank. Ultimately, the Bank is owned by the people of Canada.

http://www.bank-banque-canada.ca/en/about/are.html

So long as Canada like the US is the home of such a high concentration of the worlds investor population labour will never fall to a level where productivity parity with Asia is even remotely possible. Talking about productivity in the current enviorment is pointless, parity is impossible.

Labour productivity is far higher in the West than it is in developing Asia. You can find the data in the World Bank's Development Indicators. Stephen Golub has also done a great deal of work in this field as well. (I'd link it, but its midnight and its time to turn this thing off.)

[Yaro]

Sorry for the long delay in replying...

The Bank was founded in 1934 as a privately owned corporation. In 1938, it became a Crown corporation belonging to the federal government. Since that time, the Minister of Finance has held the entire share capital issued by the Bank. Ultimately, the Bank is owned by the people of Canada.

This is an interesting situation; it explains why the bank is listed as a private corporation. Actually a comparatively elegant solution. Is this a unique situation in the first world? Thanks for the information.

Labour productivity is far higher in the West than it is in developing Asia. You can find the data in the World Bank's Development Indicators. Stephen Golub has also done a great deal of work in this field as well. (I'd link it, but its midnight and its time to turn this thing off.)

Labour productivity is higher in the west because it is currently the center for IP creation. The productivity numbers for IP are way out of wack with any manufacturing business. Industry by Industry the numbers are fairly comparable.

I suppose I will respond to your initial post though, you more then earned it .

What I said before about the difference between productivity and efficiency stands, productivity is the key to competitive behavior it’s true. However it is not the key to greater social wealth and the statistics have consistently shown that pushing productivity numbers to hard results in an actual reduction of efficiency.

At the end of the day we all will work harder but be poorer, yes that sounds impossible but its very much reality.

[Toro]

Sorry for the long delay in replying...

The Bank was founded in 1934 as a privately owned corporation. In 1938, it became a Crown corporation belonging to the federal government. Since that time, the Minister of Finance has held the entire share capital issued by the Bank. Ultimately, the Bank is owned by the people of Canada.

This is an interesting situation; it explains why the bank is listed as a private corporation. Actually a comparatively elegant solution. Is this a unique situation in the first world? Thanks for the information.

I do not know of a central bank that is a private institution today. But many once were. The Bank of England was once a private institution but was nationalized around the same time as the BofC. I do not believe the Federal Reserve Banks were ever private institutions.

[Yaro]

Interesting information, there is a great deal of conflict in the Fed Act and some other sources should make an interesting topic to research.

The Fed has been private/public several times in its history. Originally it actually belonged almost solely to the bank of England and the bank of Germany which is to say it belonged to the Rothschild’s. (An interesting topic if you’re interested).