The Bank of Canada has cut interest rates again, raising speculation Canada’s economy is slowing more than anticipated. Again, Bank of Canada Governor Stephen Poloz cites low inflation and weaker-than-expected economic growth as reasons for the cut. However, despite the economy shrinking two quarters in a row - the official definition of a recession - Poloz has used different language, referring to the latest numbers as a mild contraction. This echoes positive sentiment from Finance Minister Joe Oliver, who has stated it is "too soon to tell" if Canada is entering a recession environment.
Why do Oliver and Poloz seems scared to use the R word? I have a few theories.
A Looming Election
The Bank of Canada is bipartisan. No matter who’s in federal power, it will function and work with that party. But this is still in an election year. If Poloz was to make bold statements about how bad the economy was doing or how we’re expecting a huge slow down, it could affect how Canadians vote. Poloz is in a tough position. He has to do what’s right for the economy - in this case lower rates to stimulate growth - but also remain neutral and show no bias. Even by suggesting the economy is in distress could show he’s unhappy with how the current government is handling the country’s economic situation.
Keeping Canada Calm
The last thing Poloz wants is to raise the alarm that Canada is headed towards a long period of sluggish economic growth. Hearing those words from Canada’s top banker will send the signal to Canadians to stop spending. Generally that kind of rhetoric encourages people to start saving money in cash accounts and the stimulation the Bank is hoping for by lowering rates disappears. It’s important to keep Canadians feeling confident about their spending.
Keeping Up Appearances
Since the economic downturn in 2008 that devastated markets around the world, Canada has been held up as a shining example of economic stability. Oliver referred to this strength when rejecting Canada's recession status; he added our nation is well positioned to weather an economic battering, despite the vulnerability posed by external factors such as the price of oil and economic troubles in Europe.
Foreign Investments Could Slow
If the rest of the world believes we’re in recession, it may discourage foreign investment in Canada and result in more lost jobs. But lower interest rates will mean Canadians can afford to spend more for less. It also means they will see their loan payments stretch further as all of Canada major banks have cut their prime rates as well.
Technically Speaking... We’re In A Recession
But can we just call it like it is: a recession? If Canadians realized that we would may stop our heavy borrowing. As well, we would get ready for what looks like is going to be long period of very slow economic growth. Or as experts say, a “mild contraction.”
With everything we know so far, its time to start dealing with what is really going on with our economy. Oil has tumbled and our dollar is at a six year low. We are in a recession - it’s just so mild we can’t feel it.
Do YOU believe Canada has entered a recession? Share your thoughts in a comment.