Bank of Canada Sees Longer Economic ‘Detour’ Than Expected

(Bloomberg) -- Canada’s economic slump may end up lasting longer than first thought amid surprising signs of weakness in household spending and investment, though policy makers still expect a rebound to take place, a central bank official said.

In a speech a day after the Bank of Canada toned down its convictions over future interest rates hikes, Deputy Governor Lynn Patterson said policy makers spent “a lot of time” in policy deliberations discussing four-quarter output data that she said were weak in certain areas -- citing business investment, housing and consumption.

Bank of Canada Sees Longer Economic ‘Detour’ Than Expected

The soft data means the economy will probably be weaker in the first half of this year than the Bank of Canada had been anticipating as recently as January, Patterson said. Yet, she characterized the data picture as “mixed” and said the economy is likely to rebound later in 2019, boosted by a strong labor market. In January, the Bank of Canada forecast a rebound in the second quarter of this year.

“Although we figured the economy was in for a detour at the end of last year, that detour may wind up being longer than we had expected,” Patterson said Thursday in Hamilton, according to prepared remarks of her speech. “However, we still expect Canadian economic growth to pick up later in the year, supported by ongoing strength in employment and rising wages.”

The speech is consistent with Wednesday’s signals from the Ottawa-based central bank that rates will be on hold for a while as policy makers gauge the extent of recent weakness in Canada’s economy, as well as the underlying strength of the global expansion. At the same time, they haven’t abandoned the idea of the slowdown being temporary and that rates may still need to go higher -- a conviction that markets don’t share.

Not Convinced

While some economists still project a rate increase this year, swaps trading show investors are giving a higher probability to a rate cut than they are to higher rates.

Patterson reiterated verbatim the forward-looking language in yesterday’s statement that the economy continued to require stimulus and that there was “increased uncertainty” about the timing of future increases.

The speech is what the Bank of Canada calls its Economic Progress Report, which aims to provide insight into rate deliberations following rate decisions that are not accompanied by new forecasts.

Patterson said the slowdown in Canadian growth was sharper and more broad-based than expected, and came despite “strong growth in employment and labor income.” While the weakness in the energy sector was largely expected, other areas were surprisingly weak. She provided some explanations for the disappointing numbers.

Soft Investment

Tepid business investment, for example, may have been due to continued concerns about ratification of the new North American free trade agreement, as well as the impact of growing global trade tensions between the U.S. and China.

Businesses also may not have had time to react to accelerated depreciation tax changes announced by the federal government in November.

“If so, we should begin to see a pickup in the first quarter of this year, which would be consistent with recent quarterly readings from our Business Outlook Survey,” she said, citing the bank’s survey of executives that have been indicating a more robust picture for business spending.

The big negative surprise in housing meanwhile was largely due to renovations.

“There are significant adjustments occurring in housing markets, and it will take time for these adjustments to be completed,” she said.

Patterson also highlighted some positives, including a 6 percent increase in service exports and a slight rise in mortgage credit growth.

On consumption, she said one factor leading to slower spending growth could be linked to weaker activity in housing sales, but the central bank needs more data “to better determine the factors at play.”

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