Canadian Economy Floundering

Bank of Canada holds rate, warning recovery is losing momentum

OTTAWA — Two months into the job, the new governor of the Bank of Canada now appears to be hedging his bets on when the long-promised, business-driven recovery will kick into gear.

Stephen Poloz and his policy team are cautioning that although the global economy is expanding “broadly as expected, its dynamic has moderated.”

And that, they say, is “delaying the anticipated rotation of demand in Canada towards exports and investment.”

Or, as one economist put it: The Great Rotation seems to be going “counter-clockwise,” falling back on housing and consumer spending in the absence of anything else.

Mr. Poloz, 57, on Wednesday oversaw the central bank’s second interest-rate decision since he took over from Mark Carney on June 3.

The stay-the-course rate statement echoed initial cautionary comments by Mr. Poloz — who previously headed Export Development Canada — that businesses are unlikely to begin spending more until global conditions, particularly in our largest trading partner to the south, show stronger signs of solidifying.

That was supposed to be happening by now.

“Recent data, however, point to slightly less momentum overall than anticipated,” policymakers acknowledged Wednesday.

 My view:

The commodity dependent Canadian economy is losing steam, despite $107 per barrel oil and record low interest rates.

While the housing market still remains strong in some markets, mortgage rates are creeping steadily higher and act as a drag as mortgages come up for renewal.  Unlike mortgages in the United States, many Canadian house mortgages float near the prime rate or are locked in for short periods of time, typically 1 to 5 years.

Imagine the shock to the home owner whose floating mortgage rate around 3% (2.83% for a variable 5 year) suddenly rises to 4.5% or higher (4.74% for a closed 4 year rate).  On an overpriced house with a $400,000 mortgage over 25 years, payments would rise from $1,861.67 to $2,267.58, a rise of 21.8%!

Surely, this is yet another pin to prick the lingering housing bubble!