OTTAWA — The governor of the Bank of Canada says we “should not fret” about the current slowdown in international trade, nor should we worry that it could lead to another economic downturn.
Instead, Stephen Poloz told a New York audience on Tuesday, companies should embrace a “new balance” by continuing to expand their export markets.
As well, Poloz said it would take “another negative shock” to the economy for policymakers to consider cutting interest rates — as the central bank did in January and July of last year when the global plunge in oil prices pulled the Canadian economy into a temporary recession.
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“What would it take to get us back into the bias toward easing? It would be another negative shock, but it would need to be obviously a shock which is of some significance or an accumulation of other shocks,” Poloz said during a news conference, following a speech to a group of Canadian and U.S. securities experts.
There would have to be “a significant delay in that process of getting the economy back to full capacity and inflation on target,” he told reporters.
Poloz added that major hurdles could come in the form of a big correction in China’s economy and its impact on global growth, including the possibility that output in the U.S. — Canada’s biggest export market — could also weaken.
“None of these things are in our forecast, but those are just shocks that economists think about,” he said.
For now, the central bank governor said, “we should not fret that global export growth hasn’t recovered to pre-crisis levels.”
Instead, Poloz said the global recovery from the financial and economic crises of 2007-09 would gain strength if companies and investors “find new ways to improve the efficiency of supply chains in many geographic areas.”
“Most of the cyclical part of the slowdown in trade should be reversed as the global economy recovers, even if that is a slow process,” he said.
International commerce may have outgrown the confines of the World Trade Organization, for instance, in the past decade but there are new opportunities for countries to pursue, Poloz said.
“The most important structural factor behind the slowdown in trade growth is that the big opportunities for increased international integration have been largely exploited…. China can join the WTO only once.”
Poloz added it’s now time to build new trade networks. For starters, policymakers should be working to help initiatives like the Trans-Pacific Partnership and the Comprehensive Economic and Trade Agreement between Canada and the European Union “to become a reality.”
But companies must “nudge forward” with moves such as establishing foreign affiliate operations that are still managed from their home base, Poloz said, which for some firms “effectively acts as a substitute for international trade.”
“The fact is that policy actions — both monetary and fiscal — taken in the wake of the global financial crisis prevented what would have been a second Great Depression. But many negative forces (that) were acting then are still acting now. That’s why ultra-low interest rates are not causing rapid growth and inflation,” Poloz told his business audience.
But “if you think that monetary policy is not working, ask yourself what would have happened if interest rates suddenly returned to three or four cent,” he said.
“Most would agree that such a move would trigger a recession. This is just another way of saying that severe headwinds are still acting on our economies, years after the crisis, and low interest rates are keeping them at bay.”