Slow growth is the new norm, says Poloz

First months of this year have shown less growth than he expected, says Bank of Canada governor

HALIFAX – Slow economic growth is the new norm and will require central bankers to keep interest rates low for longer than they would have in the past, Bank of Canada governor Stephen Poloz said Tuesday.

“The global economy may not be just suffering through a hangover from the financial crisis,” he said in notes of a speech delivered to the Halifax Chamer of Commerce.

“There are other, longer-term forces at work as well.”

He said some analysts are suggesting we may be facing a long period of stagnation.

“One specific consequence would be that even extraordinarily low policy interest rates could prove to be less stimulative than in normal circumstances,” Poloz said.

The Bank of Canada’s policy interest rate has been at 1.0 per cent since September 2010 and hit at a record low of 0.25 per cent in April 2009 to stimulate growth following an financial crisis in late 2008.

Poloz said it’s to be expected that recovery from the abnormally deep 2008-09 recession will take more time than usual but added there are probably other factors that are stalling growth.

He said that the baby boom generation born from the mid-1940s to mid-1960s — in Canada and around the developed world — is entering retirement age.

What is making the situation worse in terms of growth, says Poloz, is that boomers in the developed world have been putting their money into real estate rather than investments that can stimulate the economy, such as productive infrastructure and business investment.

Real estate assets in Canada accounted for 40 per cent of total wealth in 2012, he pointed out, as opposed to only 32 per cent in 1999.

In the near term, Poloz said the first months of this year have shown less growth than he expected.

Poloz said he still believes growth will be above the so-called two-per-cent potential and approach 2.5 per cent in both 2014 and 2015 — as the Bank of Canada said in its January forecast.

But Poloz has left some room to trim that forecast in next month’s monetary policy report, noting that some indicators are suggesting the first quarter ending March 31 may be weaker than he expected, and the reasons could go beyond the unusually cold winter.

“Although we continue to expect above-trend growth in Canada this year and next, the recent data suggest that the first quarter will be on the soft side,” Poloz said. “This mostly seems attributable to unusual weather, but it bears deeper analysis.”

Several economists have recently downgraded their forecasts for the year to the low two-per-cent range on the premise that the export sector will take longer to recover and the housing market is slowing.

Poloz said he will also discount the February inflation report, to be released Friday, noting that it is based on temporary factors and suggesting the underlying inflation is about 1.2 per cent.

Overall, he said, while the global outlook remains problematic, it is healing and the long-expected improvement in the U.S. economy will eventually lift the Canadian boat as well.

“This will inevitably lead to more growth in Canadian exports and, with the reduction in uncertainty that comes with that, more investment in Canada’s economic capacity, including creating more companies — and the much-anticipated rotation in growth.”

That has been Poloz’s outlook since he took charge of the central bank last summer, but the gist of his Halifax address is that the return to normal, in terms of growth and interest rates, is still a ways off.

With files from Julian Beltrame in Ottawa

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