Stephen Poloz also said we must listen to financial markets but accept that they may exaggerate
The global trend towards protectionism and bubble potential for some Canadian housing markets are among the biggest concerns for the Bank of Canada right now.
Speaking at the Greater Vancouver Board of Trade this week, BoC governor Stephen Poloz was generally positive about the Canadian economy but highlighted some potential risks.
Protectionism and trade disputes are the big story and the governor said that the bank estimates they would result in a decrease in global GDP of around 1% permanently, even if growth recovers from this lower level.
He said that the current uncertainty around trade, including the US-China dispute, is hampering business investment and exports. Although he noted that Canadian companies are very good at mitigating challenges and finding innovative ways to meet barriers.
The governor also talked about the housing market and the rebound in demand that has been evident in recent months.
He said that the BoC will be closely monitoring markets for signs of “froth” – conditions that precede a housing bubble – especially as population growth is driving demand, that construction is not meeting.
“The fact is, the fundamental demand for housing appears to be outpacing our ability to build new homes, which can put renewed upward pressure on prices,” Mr Poloz said. “It can be very unhealthy when the situation becomes speculative because it can lead to a sudden downdraft in house prices later, with wider implications for the economy.”
He added that housing demand would mean higher levels of household debt but that the B-20 mortgage guideline was acting well to curb risky borrowing.
“We are confident that the stock of household debt is becoming less of a threat over time,” he said.
Financial markets exaggerate
Mr Poloz talked about the financial markets and the importance of the BoC understanding the messages they are sending.
Addressing the yield curve inversion of a year ago, he said that many took this as a sign of imminent recession; this was not the case.
“There is certainly some historical correlation between inverted yield curves and recessions. However, in a period of low interest rates and generally flat yield curves, we may see more frequent inversions that indicate slowdowns, rather than recessions,” the governor said.
Acknowledging the record highs of the stock markets recently, Mr Poloz said that this has been boosted by easing of US-China trade tensions but added a note of caution for the bulls.
“Perhaps the lesson from all of this is this: never ignore what markets are telling you, but keep in mind that they are prone to exaggeration,” he said.