Despite 'serial disappointment' on Canadian recovery, Poloz is stubbornly upbeat: Don Pittis

Bank of Canada governor Stephen Poloz will have to forgive us if we say we've heard it all before.

Poloz and his senior deputy Carolyn Wilkins insist that despite the latest setback — this time blamed on Fort McMurray fires and Britain's Brexit vote to leave Europe — the Canadian economy is heading back to health and there is no need for a rate cut any time soon.

And they say this time they have the data to prove it.

• Bank of Canada holds rate at 0.5%
• Royal LePage predicts 12% rise in house prices

Before the Bank of Canada's latest monetary policy report yesterday, a few analysts were hinting that the bank could actually cut interest rates to boost a weak economy. Others suggested that if not now, a rate cut was coming later this year.

Market surprise

But Poloz and Wilkins, who played a bigger role than ever in yesterday's monetary policy press conference, surprised the market by their determinedly optimistic tone.

Just as the report's embargo was lifted at 10 a.m. and its contents rushed out onto currency markets, the Canadian dollar popped up by half a cent, a sign of confidence in the Canadian economy and sign of a belief that rate cuts are not on the table in the near future.

For those who follow the Bank of Canada statements from month to month and year to year, there is a vexing pattern to the bank's optimism. 

Recovery coming

The recovery is just over the hill and around the corner, Poloz tells us repeatedly. That is, once we get the current temporary problem out of the way.  

• Poloz awaits sunrise after long industrial sunset
• Poloz wants us to release 'animal spirits'

Poloz and Wilkins admit that the Canadian economy is by no means floating on calm seas. There are still sharks circling.

Of course the big threat hanging over the Canadian economy remains the overheated property markets of Vancouver and Toronto. The bank is very clear that this problem has not gone away. It seems Poloz remains hopeful that eventually lenders and borrowers will come to their senses.

"Prices appear to be outpacing anything you can write down as fundamentals," said Poloz, who warned explicitly of the rising risk of "flat or declining prices" but he says such a risk is almost impossible to quantify.

Beware extrapolation

"There can be a concern if people are basing their decisions on an extrapolation" of recent price trends, he warned. Extrapolation just means assuming what has happened will continue to happen.

Apart from steadily rising property prices in Vancouver and Toronto, signs of recovery have been choppy, said the central bankers.

The impact of fires in northern Alberta has hit the resource side of the economy. The process of adjusting to low oil prices will only come to an end around December. Non-resource exports have also been uneven.

"Export data has been particularly volatile," said Wilkins.

To a large extent that volatility can be laid at the door of Brexit, the disruption in markets caused by "unmeasurable, unquantifiable risks" as the new arrangement between Britain and Europe settles out over the coming months and years. European banks have already been hurt by the instability, said Poloz.

• No clear end to uncertainty after Brexit vote

And Poloz says business investors, especially in Canada's critical U.S. market, have once again delayed plans to expand in the face of this new uncertainty imported from Europe.

So with all those uncertainties, why all the optimism?

Well, according to Poloz and Wilkins, it all comes down to Chart 6 in the July Monetary Policy Report.

'A great chart'

"We have a great chart in the Monetary Policy Report that shows that non-commodity exports have recovered almost to their pre-recession peak, which puts the recent volatility into perspective," said Wilkins in her opening remarks. 

Later, challenged for his optimism, which is so unlike many other commentators, Poloz admitted Canada had gone through "periods of angst" and that "serial disappointment is behind all this." But he had what he seemed to think was a foolproof answer. 

"You've seen Chart 6?" Poloz asked the reporter.

"Well, that's a lot of growth in non-commodity exports in the past few years, and especially over the past two to three years," Poloz drawled confidently. "That keeps our faith in the core narrative."

We can all hope that is true, but a statistician might notice a weak point in Chart 6: those dotted lines where the data has not yet been collected.

So while it is good to be optimistic, maybe we should take the governor's advice and be just a little bit wary of basing our decisions on an extrapolation. 

Follow Don on Twitter @don_pittis

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