OTTAWA – The Bank of Canada governor tried to offer calming words Thursday about the disappointing retreat of the country’s economy over the first three months of 2015, saying the performance was only a little worse than its projection.
But it remains to be seen how that unexpected contraction might influence Stephen Poloz’s forecasts for the rest of the year.
Poloz made his first public remarks since a recent data release showed Canada’s economy shrank in the first quarter at an annualized rate of 0.6 per cent. The grim reading was lower than projections, including the central bank’s own estimate of zero growth.
Economists responded swiftly, slashing their forecasts for real gross domestic product — a measure of economic growth — for the rest of the year.
With the October federal election date approaching, the downgraded expectations fuelled the ever-important political debate on the economy. Federal Finance Minister Joe Oliver has attempted to downplay concerns over the economy’s stumble out of the 2015 starting blocks.
Poloz provided few clues Thursday whether the recoil would force the Bank of Canada to tinker with its forecasts when it releases its next formal update, scheduled for July 15.
He did, however, comment on some of the early second-quarter numbers that have already been released.
Poloz noted on one hand how recent labour market data has been “very impressive,” but he also said international trade figures at the start of the second quarter had been “a little disappointing.”
“We have a lower starting point going into this next forecast,” Poloz said, referring to the worse-than-expected result to kick off 2015.
“The hand-off (from the first quarter) is clearly a negative one.”
He also acknowledged how the first-quarter GDP fell a bit short of expectations: “A little less than expected, I would say not materially” because it was only about half a percentage point from the prediction.
Earlier this year, Poloz made a surprising prediction in a Financial Times interview, saying the oil price drop would make Canada’s first quarter figures look “atrocious.”
In April, the Bank of Canada projected real GDP to grow by 1.8 per cent in the second quarter and to average 1.9 per cent for 2015.
Private sector economists have said the central bank would likely have to lower its outlook following the first quarter letdown.
Canada’s early slide this year has been blamed on many factors: the particularly harsh winter in many parts of North America, the failure of other sectors to pick up the slack, weaker-than-anticipated demand from the United States and the oil price collapse.
Poloz discussed the still-uncertain extent of the economic fallout from the oil slump on the crude-exporting country.
“We’ll happily admit that we don’t have a full reading on the oil price shock yet,” Poloz said.
“In many ways we’ll be monitoring this shock for some time.”
The fallout from low oil prices was also examined in the bank’s latest financial system review, which Poloz released Thursday. It’s a semi-annual assessment of potential weak spots and risks to the financial system.
The report said the steep drop in crude prices had left the country more vulnerable to any significant event that would lead to widespread job losses and falling incomes.
The consequences would reduce the ability of Canadians to service their ever-rising debt loads and could set off a widespread housing price correction, the bank warned.
It identified the country’s climbing level of household debt and its persistently overvalued real estate market as key vulnerabilities.
The review also pointed to particular weaknesses in the crude-producing region of Alberta, where the proportion of highly indebted households is among the highest in Canada.
The document, however, also noted how the oil slump on its own was unlikely to set off considerable systemic stress and the probability of a severe recession remained low. It also said financial reforms underway in Canada and abroad have put the Canadian system on better footing to absorb economic shocks.
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