Stephen Poloz, and a potential Canadian rebound foretold: Don Pittis - Action News
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Stephen Poloz, and a potential Canadian rebound foretold: Don Pittis

Canada is in a downturn but not a recession, says the Bank of Canada. Central bank governor Stephen Poloz seeks omens of a late-summer rebound. Serious recovery may be in the cards, but only if the economic stars align.

Canada expected to bounce back from short-term gloom if the economic stars align

Like Mexico's self-declared Grand Warlock Antonio Vazquez Alba, Bank of Canada governor Stephen Poloz must stick out his neck and divine the economic future on slim evidence. (Reuters)

An ostensibly gloomy outlook from the Bank of Canada holds a tantalizing hint of coming good fortune.

As hegazes deeply into hiseconomic crystal ball, Bank of Canada governor Stephen Poloz imagine himin aZelda-the-Soothsayeroutfitmay be seeinga cloudyvision of aCanadian recovery. But it can only happen ifthe economic stars align just right.

Speaking of augury, it may bepresumptuous for an economic commentator toread so much into the five scant paragraphs releasedby the Bank of Canada. If you have doubts, pleaseperuse anddecipher them.

Hope amidwoe

There is no question that amidthe woethere are seeds of hope.

But first, the woe, because in the short term, Polozthe Oracle sees dark days ahead. There are fourprincipal points of gloom.
Falling gas prices have encouraged American drivers to get into their cars, which has helped to eat away at the North American oil glut. (Reuters)

"Household vulnerabilities have moved higher," the bank says, as house prices soar in some places and fall in others. That means the bank has not completely ruledout disruptions in the property market.

"Business investment and intentions remain disappointing," says the bank release. It must be disappointing indeed for Poloz,who has repeatedly foretold a recovery in Canadianbusiness investment and exports.

Across the distant seas, goes the current divination,"ongoing geopolitical factors[are]contributing to fragile market sentiment."

A shrinking economy foretold

And perhaps worst, the forest fires in northern Alberta will knock the stuffing out of growth, cutting "about 1.25percentage points off real GDP growth in the second quarter."

Since the forecast was for a meagre oneper cent growth in the quarter, a few minutes on the calculator shows that according to the new soothsaying,the economy will actually shrink by a quarter of a per cent during April, May and June.

But wait. Do not yetpush through the beaded curtains of the fortune-telling booth in despair. In my reading of the Bank of Canada's reading, it is possible to see some good news in the future if we are dealt the propercards.
Home builders work in Carlsbad, Calif. A surge in U.S. housing starts shows demand may wash over the border, one more factor giving Canada a year-end economic fillip. (Reuters)

As the bank has noted, the U.S. economy isshowing renewed signs of strength. Besides employment, mentioned specifically in the bank's statement, new figures show the U.S. housing market in rebound, a very good sign for Canadian producers of constructionsupplies.

U.S. election year

While Poloz's opposite number in the U.S., Federal Reserve chair Janet Yellen,is considering raising rates in June, there are good reasons to suspect the Fed will be very careful before putting a tight lid on the economy during an election year.

A tiny increase in U.S. rates this year is unlikely to prey upon those"household vulnerabilities" in the property sector thatthe bank warns about. At least not this year.

Lower U.S. gas prices have encouragedAmericansto jump into their cars, and with luck they will come and spend their overvalued greenbacksin Canada during their summer holidays.

Meanwhile,declines inproduction in Nigeria andCanada, here due to theFort McMurrayfire, mean oil prices seem to beon the rise to $50 US a barrel.
Fire has devastated the Abasand neighbourhood of Fort McMurray, but rebuilding and restarting oil production will stimulate Alberta's and Canada's economy in the second half of the year, says the Bank of Canada. (Reuters)

If the commodity can hang on to those gains while Canada's oilsandsproduction restarts, that will be a good omen for the wider economy. Combined with that, under the "ill wind" category, the rebuilding of homes and infrastructure razed by the giant forest fire will lead to a burst of spending in Alberta.

Rebound expected

As the Bank of Canada puts it:"The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins."

In the longer term, other soothsayers have foretoldmany frightening things. Eventually rising interest rates and an unaffordability crisis mayrein in the real estate sector. Carbon-producing industries must eventually wane if the globe takes climate policies seriously. Those "geopolitical factors" may yet worsen and create economic trouble.

But of course diviningthe economic future is no easier that predicting whetheryou will meet a tall, dark stranger.

Some wild prognostications

Maybe Bombardier will expand its capacity and actually fulfil its light-rail contracts. Maybe John Chen will find the money to makeBlackberry a software powerhouse. Maybe Valeant will get its books in order and figure out how to end the drug shortage. Maybe Canadian companies you've never heard of will surge into the headlines to become world-beaters.

Even if those wildprognostications don't come true, there is a real chance the economic stars will align at the end of this year.

Ifthe U.S. economy grows.If federalstimulus begins tokickin. If commercialinterest rates remain moderate. If oil stays high and Alberta rebuilds. And if the housing market can hold its own for another year or so.

If all those things come true and individually, none is unlikely thenthe second half of 2016may be the perfect opportunity for Canada's industrial economy to rebound, providing a healthy bit of padding for future bumps and scrapes.And that is not such a wild prediction.

Follow Don on Twitter@don_pittis

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