Bank of Canada study says slow growth could be ‘new normal’
To borrow a phrase from the Bank of Canada governor, the pattern of economic growth since the last major downturn has been a “serial disappointment.”
Stephen Poloz first used that catchy phrase nearly two years ago. That ongoing refrain, however, has not lost its urgent pitch.
Seven years after the global financial crisis, which overlapped the global recession, “growth in many advanced economies continues to disappoint,” the central bank said in a study published Thursday.
“Typically, growth rates during recovery years are often stronger than long-run averages as economies strive to catch up on lost activity,” the authors of the report said. “This time, however, growth has continuously disappointed, and forecasters have regularly adjusted their forecasts downward.”
The central bank points to annual growth in advanced economies of around 3.6 per cent between 1985 and 2007, before falling to 1.4 per cent from 2010 to 2014 — when they should have been in recovery mode.
So, what can the Bank of Canada do to limit serial disappointment?
In their study Is Slower Growth the New Normal in Advanced Economies?, the authors point to ongoing regulatory reforms in the global financial sector that “should reduce the likelihood” of another large financial crisis — and limit the need for so-called “negative” interest rates, something that has already taken hold in parts of Europe.
As well, according to Abeer Reza and Subrata Sarker, both international economic analysts at the Bank of Canada, monetary policymakers could help stimulate output by so-called unconventional policies — such as forward guidance and quantitative easing, a bond-buying frenzy used by the U.S. Federal Reserve and meant to keep money flowing through the financial system. QE has also been used by the European Central Bank, Bank of England and Bank of Japan.
At the same time, the study says, policy-makers could reduce their rates for commercial financial institutions to below zero, or negative territory — meaning private lenders would pay a fee to deposit their money at central banks, something the ECB has already done.
“Some observers view the current muted recovery as a prolonged cycle in the face of multiple headwinds and emphasize the role of private and public deleveraging in the aftermath of the financial crisis,” Thursday’s study says.
“Others suggest that slow growth is due to a structural inadequacy of demand leading to a long-lasting liquidity trap, while other view it largely as supply side in nature, reflecting demographic and technical factors.”
Poloz has responded to “serial disappointment” concerns by cutting interest rates twice in 2015 — to 0.5 per cent — as the collapse in oil prices pushed the Canadian economy into recession in the first half of the year. The second half is likely to show meagre growth.
The bank’s policy-makers also expect gross domestic product to increase 1.1 per cent overall in 2015, down from 2.4 per cent the previous year, with the pace picking up to around two per cent in 2016.
“Is slower growth the new normal? Yeah, pretty much. And then it’s only going to slow further,” said Benjamin Reitzes, senior economist at BMO Capital Markets.