Dec 15, 2020
Bank of Canada's Macklem sees economy entering 'difficult stage'
Bank of Canada may have to taper its bond buying spree: CIBC's Mendes
Bank of Canada Governor Tiff Macklem warned the nation’s economy could temporarily shrink again amid a second wave of virus cases, tempering good news on the start of inoculations against COVID-19.
In his last speech of the year on Tuesday, Macklem said uncertainty remains elevated and new restrictions could trigger a small contraction at the start of 2021. On the plus side, “news on vaccines provides some reassurance that more normal activities can resume sometime later next year.”
“The economic recovery from the pandemic is at a very difficult stage,” Macklem told the Vancouver Board of Trade via video conference. “Near term, rising COVID-19 infections will dampen growth and could even deepen our economic hole.”
Speaking to reporters after his remarks, Macklem said data suggest only a marginal increase in output in the final months of 2020, followed by a modest negative or small positive in the first three months of next year.
Overall, Macklem’s comments reflect a central bank that is in a holding pattern on policy, waiting for economic developments for cues on its next move.
Canada’s currency rose to the highest in more than two years in the hour after Macklem’s speech before paring gains slightly during the press conference. It was trading 0.5 per cent higher at CUS$1.2704 against the U.S. dollar at 4:23 p.m. Toronto time. The yield on 10-year government bonds rose 1 basis point to 0.73 per cent.
Balance of Risks
In a speech last week, Deputy Governor Paul Beaudry emphasized how both downside and upside risks are “in play,” and said policy makers stand ready to move in either direction to respond.
Macklem’s remarks Tuesday were focused on the need to strengthen exports, and less on the current economic outlook. He reiterated borrowing costs will remain low for long, and listed tools that would be available to the central bank should they need to take additional measures.
Officials at the Bank of Canada have pledged not to raise their 0.25 per cent overnight interest rate until economic slack in the economy is fully absorbed.
The governor, in his speech, laid down some markers of what he believes a sustainable recovery will look like.
“So far, household spending has led the way. But for the economy to fully recover, it needs to be firing on more than one cylinder,” Macklem said. “To be sustainable, the recovery must broaden to include exports and, with this, business investment.”
He also referenced the headwinds associated with recent gains in the Canadian dollar, which Macklem said reflected “broad-based” weakening of the U.S. dollar.
“This is hurting the competitiveness of Canadian exporters in our largest market,” he said in the speech. The loonie’s recent rise has been “material” and is “on our radar screen,” he added during the press conference.
Still, Macklem said he believes exports and business investment can rebound more quickly than they did after the global financial crisis more than a decade ago, especially if policy makers and corporate leaders step up. Moves could include removing inter-provincial trade barriers and ramping up infrastructure projects. He also said a well-educated and multinational workforce will help attract foreign investment and lead to increased exports.
“Businesses have the leading role to play here,” Macklem said. “Investment in productivity-enhancing machinery and equipment is vital.”