BoC drops outlook

Photo: The Canadian Press

The Bank of Canada has downgraded the country's growth outlook yet again with fresh projections Wednesday that see an impending drop in housing activity tied to new government rules and, more importantly, signs of a permanent decline in exports.

The gloomier economic picture weighed heavily enough on the central bank's governing council for them to actively discuss lowering the trendsetting interest rate from its already-low perch of 0.5 per cent, governor Stephen Poloz said. But the bank ultimately kept the rate where it's been since July 2015, as analysts had widely expected.

The bank's latest monetary policy report was released as the economy continues to struggle to emerge from a prolonged period of slow growth and recover from the negative effects of the plunge in oil prices that began two years ago.

On exports, Poloz said the bank's latest projections incorporated a "structural" shortfall to help account for the long-running disappointment in the numbers. The change was made despite some encouraging export data in the last couple of months.

"If we get lucky, then we'd get some of it back," Poloz told a news conference in Ottawa. "But at this stage we can't really predict that."

The downward revision for exports trimmed the bank's forecast three months ago for real gross domestic product by 0.6 per cent between now and the end of 2018.

Overall, the bank is now projecting real GDP to expand by just 1.1 per cent this year, down from its July projection of 1.3 per cent. For next year, the bank is forecasting growth of two per cent, down from its previous call of 2.2 per cent.

The report also predicted growth to take a hit from a decline in real estate sales activity that's expected to follow recent federal measures intended to stabilize the housing market and curb the vulnerability associated with the accumulation of household debt.

The bank predicted the impact of those changes could lower real GDP by 0.3 per cent by the end of 2018, though Poloz insisted that number remains "highly uncertain."

He said there are many moving parts, such as how potential homebuyers will react to Ottawa's new rules. The measures include a stress test for all insured mortgage applications to ensure would-be borrowers would still be able to make payments if interest rates rose or their personal financial situations changed.

Asked about the potential cost of the measures to the economy, Poloz compared it to buying insurance against the possibility of another economic shock or recession.

"By paying a bit of a price there you help avoid, at least, something that could be much worse for the economy and therefore it's a good deal," he said.