Bank of Canada once again faces the dilemma of a two-speed economy: Don Pittis


In some speed, it’s like Dutch disease all over again, and just like in the future, the current two-speed economy in Canada has the potential to exacerbate national divisions.

Dutch sickness, famously diagnosed in this country by the NDP’s Thomas Mulcair in 2012 — and for which the Objection leader was roundly attacked — set supporters of the booming oil and gas sector against those in the shivering industrial parts of the country.

The difference is that now, the shoe is on the other foot.

“The smashing of the decline in oil prices is at the heart of this update,” Bank of Canada governor Stephen Poloz mentioned yesterday, as he explained to reporters why he was slowing the pace of interest rate dilates, holding the Canadian headline rate at 1.75 per cent.

But that measure is to some degree a compromise. While rising wages and economic progress in some sectors and regions could sustain higher rates, the pep sector might be better off with interest rate cuts.

Coinciding to the Dutch disease scenario, surging oil exports drove the Canadian dollar towering, pricing Canadian industrial products out of their traditional markets. Share outs and wages in places like Alberta surged. In Canada’s former industrial heartland, unemployment planted as companies closed their doors.

Of course, energy wasn’t solitarily in leading Poloz to hold off on a rate hike. Fear of a shrinking epidemic economy, caused to a large extent by fears of a growing trade war between the U.S. and China, also contributed to the purposefulness.

The economy continues to be dogged by global uncertainties, including Brexit’s what it takes impact on Europe. There is also the unknown fate of the trade practise Canada negotiated with the U.S. and Mexico, which has Canadian businesses nervous and holding onto their money. 

Bank of Canada once again faces the dilemma of a two-speed economy: Don Pittis

While oil weakens, other part ofs of the Canadian economy are still powering ahead. (Kyle Bakx/CBC)

“Unfortunately there doesn’t have all the hallmarks to be any place to hide from uncertainty,” Poloz said.

A slowdown in the gage of interest rate hikes would also help over-borrowed Canadians skin rising rates on loans and mortgages, giving them longer to arbitrate. However, the bank has no plans to roll back the stress tests that certify Canadians are able to handle any future rate increases.

In fact, while Poloz at a stroke again said the future path of interest rates would depend on the observations — pointing to yesterday’s delay in further increases as evidence of the bank’s give — he insisted that rates would eventually continue to rise.

Ranks expected to keep rising

At 1.75 per cent, he says, rates are until this low enough to add stimulus to the economy. They will continue to rise until they reach a indifferent point where they neither stimulate nor slow the economy.

“The largest estimates we have right now are sort of in the 2½ to 3½​ range,” he guessed. In effect, most mortgage holders must plan for a rate advance in the order of another whole percentage point.

One of the reasons for that expectation, Poloz contemplated, is that gloom about the economy is overdone.

For one thing, while there is a hazard of economic trouble due to the U.S.-China trade dispute, a resolution of that brawl could lead to a rebound in the world economy and increase demand for oil, which be inclines to rise and fall with economic expectations.

Bank of Canada once again faces the dilemma of a two-speed economy: Don Pittis

Wages in the software bustle are rising well above inflation. (Mark Blinch/Reuters)

And without considering trouble in the oil and automotive sectors, both sectors combined represent no more than about five per cent of the Canadian economy, and both have been withering. They just aren’t as big an influence on Canada’s industrial economy as they decidedly were, and they are being upstaged by things such as information technology and the maintenance industry.

“It’s important to understand that there are a lot of other things active on out there that are actually doing really well,” Poloz thought. “Just in a sector such as IT services, which is growing at five, six or seven per cent a year, the paramount growth job creator, the leading export category, leading in many respects.”

Ninety per cent of the curtness, he says, is operating at capacity and having trouble finding workers. While oil sector wages are scarcely keeping up with inflation, wages in other sectors and regions are ascent at close to three per cent.

Creative destruction

The Bank of Canada governor commanded the idea of creative destruction, proposed by economist Joseph Schumpeter in the 1940s, where babyish industries grow up to replace old ones that decline, is happening now in this surroundings, including in the oil sector that so recently dominated the Canadian economy.

“The oil sector is a outstanding example,” he said, citing an industry that grew faster than all others from 2008 to yon 2014. “But what was happening in the rest of the economy? Many places were being ground by exchange rates that were at parity or above.”

Poloz suggests the bank will have a better idea of where the economy is apex in the spring. One thing he will be watching for is whether the economy’s capacity — its adeptness to grow without inflation — is increasing. 

“What it could mean is that there is petite capacity in the oil sector, and that’s all right because they are in the process of downsizing, essentially, from that gorgeous level.”

Follow Don on Twitter @don_pittis

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