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Quiet day. No major economic releases. Main news was a swan song speech by Bank of Canada Governor Stephen Poloz, who steps down at the end of this week. His message was that Canadian economy is entering “unknowable times,” and that the new Governor and the Governing Council will be challenged with “unparalleled uncertainty.”
In many commentaries, I have stressed that the greater risk is deflation rather than inflation. Yes, there is massive stimulus, but this was launched to combat depression risks. Governor Poloz’s comments support this perspective. Here is a few key comments:
“Picture the pandemic creating a giant deflationary crater in the middle of the economy…It takes what looks like inflationary policies to offset it.”
“Although a minority of observers worry that these extreme policies will create inflation some day, our dominant concern was with the downside risk and the possibility that deflation could emerge. Deflation interacts horribly with existing debt, the two main ingredients of depressions in the past”.
Governor Poloz handled monetary policy extremely deftly during his term. I remember a comment he once made to me that he wanted the history to say that he did everything he could do support economic growth—and I think he achieved that. I remember expressing my concerns that low rates were creating a large personal debt imbalance. His rebuttal was to ask me what I would have done with monetary policy if I had been in his position. Given the slow trend rate of growth, I had to admit that I probably would have done the same. Poloz flagged the risks related to debt growth and tried to rebalance interest rates when the economy was in better shape, but he also championed the use of real estate regulations as a more targeted manner of address the debt issue.
This week’s releases include US consumer confidence tomorrow, Fed Beige Book, and US durable goods on Thursday, Canadian GDP for the first quarter on Friday. Statistics Canada has already reported monthly real GDP at basic prices for January, February and March. Although the national income and expenditure accounts can differ from the monthly industry data, it should be close. On this basis, we are expecting a 10 percent annualized contraction in the Canadian economy in the first quarter. There should be a broad-based decline across the components.