Canadian Manufacturing

Business investment must increase, warns BoC

Latest report says exports have been gaining traction, in line with the growing momentum in the U.S. economy, but investment remains weak



OTTAWA—The Bank of Canada says it’s essential for the bulk of Canadian economic activity to begin shifting from the backs of households to business investment and exports, as it kept its trend-setting interest rate fixed at one per cent.

In its monetary policy report, the central bank pointed to rock-bottom borrowing rates as a contributor to “renewed vigour” in consumer spending and the real-estate market since July.

“Household spending still represents more than its long-run sustainable share of growth, and a rotation away from household spending toward business investment and exports is essential,” the bank said in the report.

“Exports have been gaining traction, in line with the growing momentum in the U.S. economy, but investment remains weak.”

The bank warned consumer spending has led to near-record-high housing prices and debt, leaving households exposed to economic shocks.

For Canada, the bank adjusted its July growth prediction, nudging it up one-tenth of a point to 2.3 per cent for this year. It’s keeping to its 2015 expectations of 2.4 per cent growth.

Global growth, meanwhile, has been disappointing due to factors such as financial stress in China and geopolitical uncertainties.

“Although the outlook remains for stronger momentum in the global economy in 2015 and 2016, the profile is weaker than in July and growth prospects are diverging across regions,” the document said, referring to the bank’s projections from its last monetary policy report in the summer.

The bank says it’s maintaining its overnight-rate target at one per cent—where it’s been set for four years—because of the collection of pressures from all sides on Canadian inflation, such as the lower dollar, cheap oil prices and disappointing global growth.

Since July, the bank said core inflation, which excludes some energy and food-related goods, climbed more quickly than anticipated, but remained close to its optimal two per cent target. The bank said underlying inflationary pressures are “muted.”

The central bank projects the Canadian economy to gradually return to its full production capacity in the latter half of 2016.

The report also examined some of the pros and cons of the sudden plunge in oil prices in recent weeks.

“While lower oil prices would benefit consumers, their effect on Canada would, on balance, be negative, reducing Canada’s terms of trade and domestic income,” the document said.

An enduring stretch of cheap crude could also discourage investment and activity in the oil industry as well as the sector’s supply chain, which reaches well beyond Alberta’s oil patch.

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