Interest rate cuts a two-edged sword for Bank of Canada: Don Pittis

Conjure up an image of Bank of Canada governor Stephen Poloz in Hamlet pantaloons, hand to brow, declaiming to the middle distance: "To cut or not to cut?"

A confusion of contradictory economic data means it maybe a melancholychoice. If the Bank of Canada were to lower interest rates for a third time this year at this Wednesday's meeting, thecut could spur exports and challenge other countries that have pushed their currencies lower.

But there is a danger that it may instead be taken as a warning.

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A poll of 40 economists last week by Reutersdidn't rule out another cut in rates. The consensus was that there was a one in four chance of a cut this week, and a 40 per cent chance of anothercut "at some point." But the most likely result, said the economists, was a rate freeze till 2017.

Frozen

More than ayear of rates frozen at 0.5 per cent is not a resounding vote of confidence in a Canadian recovery. But in the face of that steady-as-she-goes opinion from economists, another rate cut would be a two-edged sword.

Lower rates would make it easier for Canadians to keep up their borrowing binge, helping retail sales and keeping house prices strong. More usefully, itwould help secure lending for struggling or expanding businesses.

A byproduct of lower rates is a lower loonie.If, as many have said, our shrinking trade deficit can be credited to a low Canadian dollar,then astilllower looniecould be even better.

• Trade deficit shrinks to $593 million in July
• Low loonie may be finally helping exporters

The danger is that a cut would signal that the bank, after studying all the data we have seen and some we may not have seenhas decided thatthe Canadian economy is doing worse than anyone had thought. And while that too would help drive down the dollar, the hazard is that pessimism will breed greater pessimism.

Disentangling the data

Whether or notthe Bank of Canadadecidesto cut, it will be instructive to hear the governor's disentangling ofthe latest economic data.

The fact is that, despite some positive thinking by my colleague Paul Haavardsrud,economic indicatorsarenotunequivocally good or bad.

GDP was weak, though growthseemed to be seeing an uptick in June. While both U.S. and Canadiantrade deficits fell,U.S. factory activity hit a two-year low. And jobs figures, though hardly gloomy, were not entirely reassuring.

Improbably, Saskatchewan led the way in job creation, adding some 4,000 positions.All those jobsjust happened to coincide with adeficit the province blamed on the worst forest fire season in years.

• Saskatchewan expects $292 million deficit

Firefighter jobs and all that deficit spending (the province had projected a $107 million surplus) cannot be counted on to continue once the snow flies and the provincial government retunesits balance sheet. Alberta and British Columbia got a similar dollop of one-time spending from their fires.

In the industrial heartland of Ontario and Quebec, whichwas supposed to benefit from a lower dollar and a U.S. economic takeoff, jobs were stagnant.

Petro-economy no longer

Thatdespitethe fact that according to the latest trade figures Canada isno longer apetro-economy, as automotive exports exceeded energy exports for the first time since 2007.

Neither did new jobs across the country show a big business rebound, with public service jobs representing the lion's share of new positions.

When StephenHarper appointed Polozin 2013, many of us thought histoughest job would be raising interest rates as the global economy strengthened. Now thatrecovery seems no closer.

In a 2014speech, Poloz referred to Canada's housing sector as a "cracked tree," secure so long as nothing disturbsit.

As stock markets hit new lows last week, with the U.S. central bankcontemplatingan interest rate rise at its next meeting and the world's developing economies facingnew trials, it feels like autumn turbulence could still knock the Canadian economy awry.

To return to Hamlet, "When sorrows come, they come notsingle spies, but in battalions."

Of course Canada's future is far less gloomy than that of Shakespeare's play, which does not end well. At leastfor Hamlet.

Canada's petro-economy may be fading. Itsindustrial economy is unlikely to return it its old form. But Canada has new opportunities, for example in technology, services and education.

PerhapsPoloz will be able to take comfort in this slightly fractured Hamlet quote:"There are more things in heaven and earththan are dreamtof in your economics."