Bank of Canada Governor Stephen Poloz said it’s too early to tell whether recent improvements on the global trade front will lead to stronger trade and investment.

In opening remarks he gave in Vancouver ahead of a “fireside chat” interview, Poloz said it “remains to be seen” how Canadian business will respond to the preliminary U.S.-China trade pact. The implications for Canada are uncertain. It’s not clear whether any more of the new tariffs imposed on China will be rolled back, and there are worries the U.S. could turn its focus to the European Union, he said. A lot of damage has already been done, and these losses from the trade conflict are likely to be permanent even if growth picks up.

“It is understandable that companies are reluctant to make big investments in this setting,” Poloz said in prepared remarks provided to reporters. “On the surface, there has been some improvement on this front lately, although it remains to be seen whether this will lead to a recovery of trade and investment.”

The remarks come two weeks before the Bank of Canada’s first interest rate decision of the year, on Jan. 22. Poloz ended 2019 with the highest policy rate among major advanced economies at 1.75 per cent, and is expected to hold that title until his seven-year term ends in June. The Bank of Canada has cited two big reasons for resisting the global easing trend: the nation’s inflation has been near its two per cent target for well over a year and policy makers are wary of fueling further some of the highest household debt levels in the world.

In the remarks, Poloz cited four key areas that are top of mind for the Bank of Canada ahead of the decision: global trade policy developments, labor and housing markets, assessment of the economy’s capacity following investment revisions, and recent moves in financial markets.

Damage Done

On trade, Poloz said the central bank estimates global GDP this year will be about 1% lower due to trade conflicts. Another consideration for policy makers is measuring the impact of the trade disputes on the non-export sectors.

“We are looking to see the extent to which weakness from manufacturing may be spreading to services, employment, consumer spending or housing,” said Poloz. “In this regard, the most recent data have been mixed, so we continue to monitor the situation closely.”

Outside of trade, Poloz said the country’s labor market has shown a healthy trend over the past year, even with the recent employment slowdown, citing recent wage growth. The Bank of Canada, however, will be carefully watching whether a recent moderation in job gains persists. The strong labor market, meanwhile, along with rising population, has been supporting the nation’s housing market, the central banker said, adding policy makers will be watching for signs of froth returning to certain major markets.

Another area of focus has been recent upward revisions to investment data that is prompting the central bank to reassess how quickly the nation’s economy can grow in the future without fueling inflation, Poloz said.

On financial markets signals, Poloz said the inversion of the yield curve last year didn’t lead to a recession as some feared. In a period of low interest rates, that indicator may no longer be a good indicator of recessions, he said. Also recent stock market gains suggest markets are taking a relatively positive view of the prospects for corporate earnings, despite the uncertainty, he said.