Annual Report 2019

Let us turn now to stewardship of the Canadian economy. Amid the hype and breathless commentary around each variation in the data, one can lose sight of just how resilient the economy has been. That resilience has been sorely tested over the past three years, mostly through rhetoric and actions related to international trade. This has fostered deep uncertainty about the future of many businesses, in Canada and elsewhere, causing significant pullbacks in business investment and international trade. On top of this, there was yet another downdraft in global and especially Canadian oil prices to start 2019, deepening the already-severe adjustments to lower prices that had been underway since 2015. Finally, 2018 had seen several new prudential measures put in place to manage risks related to mortgages, along with several interest rate hikes. Last year at this time, the Bank was carefully watching to see how these developments would affect the Canadian economy, particularly the housing market.

The global economy slowed significantly in 2019, but by year-end there were signs that things were levelling off. Indeed, the Bank expects global economic growth to edge slightly higher in 2020. This does not mean that trade turmoil and related uncertainty are no longer having negative effects: the level of global gross domestic product (GDP) is now permanently lower than it otherwise would have been in the absence of new trade policies. By the end of 2020, we expect the cumulative cost to the world to approach US$ 1 trillion, or over 1 percent of GDP. However, as companies adapt to the new situation, economic growth should pick up, albeit more moderately and from a lower level of output.

Despite all this, the Canadian economy grew just a touch less during 2019 than we expected a year ago. This is because housing and related household spending stabilized and contributed to growth, even as soft investment and exports continued to hold back the economy’s expansion. In other words, Canada is not immune to global trade conflict, but for most of 2019 the negatives were offset by some positives. While many central banks cut interest rates during 2019, rates in Canada held steady amid these contrary forces. This prompted considerable commentary about policy divergence between Canada and the United States—even though US rates have now declined to Canadian levels, having previously diverged on the upside. Even so, Canadian mortgage rates were drawn down in 2019 by developments in the global bond market. This helped to support household spending and the housing market. It also served as a reminder that Canadian households are already carrying record levels of debt, which makes them vulnerable to future shocks. However, the new mortgage lending rules are having their intended effect, making the household sector more resilient to future developments.

Inflation is on target and has been there for most of the past two years—a significant achievement in light of the turbulence the economy has been through.

All this to say that the Canadian economy is in a good place overall, even if it is not in a good place everywhere. For one thing, we would prefer a more sustainable situation with more growth in exports and investment and more moderation in housing and household indebtedness. We would also prefer that the economy be better balanced regionally. Given continuing adjustments to low oil prices and ongoing transportation constraints, oil-producing regions of Canada continue to struggle relative to the rest of the country. Over history, it has been rare for all regions and all sectors of the Canadian economy to be expanding at the same time. Today’s conditions are in many ways the reverse of what we saw from 2008 to 2014, when oil prices and the Canadian dollar were high and conditions outside the oil-producing regions were challenging. In other words, even if the economy is roughly where it belongs, it is not true for every region or for every individual. There is work yet to be done—adjustments are ongoing, and confidence remains soft.

The good news is that inflation is on target and has been there for most of the past two years—a significant achievement in light of the turbulence the economy has been through. Maintaining low and stable inflation is the central tenet of our policy framework, delivering financial stability to all Canadians and a well-functioning real economy and labour market. Today, unemployment is near its all-time low. In the past seven years, unemployment rates have fallen significantly across all age groups, even as labour force participation has risen. Overall, the economy is operating close to full capacity, with evidence of slack only in certain regions and specific sectors. In other words, the macroeconomy has made it home, after more than 10 years of difficult adjustments.

News – Bank of Canada