While Finance Minister Jim Flaherty’s unexpected decision to resign stole the headlines yesterday, the bigger story may turn out to be the Bank of Canada cautioning Canadians to get used to slower growth, largely as a result of an aging population.
Baby boomers, far and away Canada’s largest demographic group, are retiring – or at least gearing up for it. And while putting more money aside for their future makes sense, this saving rather than spending mentality will have clear economic implications, Bank of Canada Governor Stephen Poloz told the Halifax Chamber of Commerce on Tuesday.
Too many boomers in the developed world have been putting their money into real estate compared with more productive uses such as business investment that can stimulate the economy. And Canada, it seems, is no different.
Real Estate Partiality Slows Growth
“When a large swath of the population is making similar decisions, the impact on the broader economy can be significant,” Poloz explained. “Savings that fund infrastructure and business investment are ‘being put to work,’ which can help improve productivity, while savings that go into housing are seen as contributing less to productive potential.”
Even though “the global economy may not be just suffering through a hangover from the financial crisis, there are other, longer-term forces at work as well,” he said. “The possibility of secular stagnation needs to be taken seriously.”
That said, he still believes growth will be above the so-called two per cent potential and could approach 2.5 per cent in both 2014 and 2015.
“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 added. “This mostly seems attributable to unusual weather, but it bears deeper analysis.”
Loonie Tumbles Following Bleak Forecast
Following what analysts viewed as a gloomy outlook, the Canadian dollar quickly dropped against the greenback, falling 0.67 of a cent to 89.8 cents U.S. That prompted BMO Nesbitt Burns to suggest that the loonie would likely weaken further to average just shy of 87 cents by mid-year.
But it’s the longer term implications – when and by how much interest rates might rise – that still remain the greater concern.
Poloz, who succeeded Mark Carney last summer, has steadily steered the central bank away from talking about boosting its benchmark lending rate – at one per cent since September 2010 – opting instead for a more neutral stance on the next direction of the bank’s trendsetting rate.
No Movement Expected On Interest Rates
Yesterday’s speech, titled Redefining the Limits to Growth, was no different, warning that uncertain economic growth and below-target inflation requires central bankers to keep interest rates low for the immediate future.
The Bank of Canada uses monetary policy to try to keep inflation running at or near a two-per-cent annual rate. While core inflation has moved slightly higher in recent months, consumer prices still appear to be growing at about 1.3 per cent right now.
The bank’s next rate announcement is scheduled for April 16, at which time it will also update its forecasts. But it looks like the return to normal, in terms of growth and borrowing costs, is still a long ways off – with interest rates likely to be lower for longer.
That’s a fleeting reprieve for debt-weary consumers but news for retirees looking to squeeze a bit more income from their investments.