Stagnation in Canadian economy should leave Bank of Canada on hold

The flat reading on February Canadian GDP illustrates need for economic stimulus

By Phil Soper

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Stagnation in Canadian gross domestic product in February makes it vital that the Bank of Canada keeps interest rates on hold.  The weakness in Canada’s energy sector is starting to spill over into the broader economy. So far we are seeing the Canadian housing market hold steady, but it is vital that the Bank of Canada support this important sector by keeping interest rates on hold.

My comments are in response to a release published on April 30 from Statistics Canada on the Real Gross Domestic Product report.  In February of this year, Canadian real GDP was unchanged, following a 0.2 percent drop in January.  The figures are not wholly unexpected, given that Bank of Canada Governor Stephen Poloz has referred to Canada’s economic performance during the first quarter of the year as ‘atrocious’.  The Bank of Canada cut its benchmark lending rate to 0.75 percent from 1.0 percent in January of this year.

The recent softness in oil prices is a positive for some parts of the country, and GDP in Canada’s service producing industries was up by 0.1 percent in February, led by an increase in retail trade. Lower prices at the pump give consumers more money to spend which does boost the economy. However the damage the oil shock has done to business and consumer confidence in Alberta and to a lesser extent, Saskatchewan and Atlantic Canada could impact the housing industry negatively. Goods production in Canada was down 0.2 percent in February, led by weakness in oil and gas extraction.

There was a 3.3 surge in the output of real estate agents and brokers in February thanks to strong home sales in British Columbia and Ontario. The housing sector is a key source of strength to Canada’s economy, and now more than ever, it is important to keep markets functioning by keeping interest rates low.

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