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The Bank of Canada’s growth downgrade wasn’t really about Canada: Erica Alini

And not as bad as you might think

(Photo: Dwight Nadig/Getty)

(Photo: Dwight Nadig/Getty)

The Bank of Canada downgraded its Canadian growth forecast yesterday, but the downward revision wasn’t really about Canada.

The central bank now expects domestic real GDP growth of 1.6%, down from 1.8%, and shaved a whopping two percentage points off its July third-quarter projection, to 1.8% from 3.8%. But the bank’s gloomier tone didn’t reflect a “home-grown slowdown,” as CIBC’s Peter Buchanan and Emanuella Enenajor noted, as much as disappointment about the U.S.

The BoC cut its outlook for U.S. growth in 2014 to 2.5% from 3.1% and predicted “modest” growth for the rest of 2013 in its October Monetary Policy Report (MPR), released on Wednesday morning. The document is no uplifting read to be sure, but it’s important to put the BoC’s darker outlook on the U.S. into context. The central bank, known and long criticized for excessively rosy forecasts under both Carney and Poloz, isn’t saying things will get worse than they are now. It’s saying the future doesn’t look quite as bright as it previously expected. The forecast is still that U.S. growth next year will be a full percentage point higher than this year. Bad news then, but moderately so.

It’s also interesting to note that the central bank seemed more focused on a general slowdown in U.S. economic activity that predates the latest fiscal crisis than on the impact of the shutdown and debt-ceiling fight themselves. The partial government paralysis in October, the MPR said, “will dampen economic growth in the fourth quarter” (emphasis mine). And the debt limit debate has likely amplified the shutdown’s negative impact on confidence. But neither features as an important cause of slugginesh in 2014 in the BoC’s view.

In fact, when discussing subpar U.S. consumer demand in 2014 and 2015 the BoC zeroes in not on consumer confidence, which took a horrifying dive during the fiscal crisis, but on jobs growth, which has decelerated since earlier this year but is still tagging along at a decent pace. (In an uplifting note, the central bank also underscored that American families have been drastically reducing their household debt, which bodes well for their ability and willingness to buy.)

Tellingly, the MPR featured this chart showing how non-farm payrolls growth and personal consumption expenditures have been moving along roughly in unison:
BoC - Oct. 2013 MPR

Normally, both jobs growth and consumer sentiment are good predictors of how much people will spend, but sometimes the two diverge widely. One of those times is when consumer confidence moves sharply up or down because of political developments rather than economic reasons. In those cases, jobs growth generally is the more reliable forecaster. The fiscal standoff of the summer of 2011 was a clear example of this, as these two charts show:

Personal consumption and consumer confidence

Personal consumption and employment

As the blue line in the first chart shows, the 2011 crisis sent consumer confidence reeling. However, as second chart shows, this didn’t have much of an impact on either jobs growth (blue line) or Americans’ spending decisions (red). On the other hand, the recession (shaded strip) is a different story: Consumer sentiment plunged because the economy was in dire straits, and people actually started deserting shopping malls, making coffee at home rather than queuing up at the corner coffee shop, and so on.

Based on historical precedent, then, U.S. demand likely didn’t fall off a cliff in October. Instead, it will probably track the pace of payrolls growth, which is below what the BoC hoped for in July, but not terrible.

Our central bank thought the U.S. recovery was just about to turn the corner and pick up the kind of speed that would help Canada wean itself from housing and household credit expansion and switch to export-propelled growth. It now expects the U.S. to limp along a little longer. The forecast, in short, is steady as she goes, downgraded from “tailwinds ahead.” It is not, however, rain and thunder.

Erica Alini is a reporter based in Cambridge, Mass., and a regular contributor to, where she covers the U.S. economy.
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