Canadian economy to hit full capacity near end of 2016: Bank of Canada

Following a setback caused by the drop in oil prices, the Canadian economy is once again heading toward sustainable balanced growth, according to the Bank of Canada.

In a speech given to the Greater Charlottetown Area Chamber of Commerce, BoC Governor Stephen Poloz noted that, overall, non-energy exports are performing well. According to the Bank’s Spring Business Outlook Survey, companies that are benefiting from stronger U.S. demand are starting to feel capacity pressures, which indicate they may soon need to increase investment.

“Outside of the energy sector, the outlook for investment is positive,” Poloz said.

The Bank is also watching trends in the creation of new companies in Canada. Many exporting companies were lost during the recession, but there are early signs of a recovery in firm creation, Poloz noted.

The January interest rate cut has contributed to easier financial conditions in Canada. A three-cent drop in the Canadian dollar would mean that companies with existing export contracts in U.S. dollars will receive an extra $15–20 billion in 2015.

Currently, the oil price shock continues to have a net negative impact on the economy. “While there’s still a risk that lower oil prices could have a greater impact, the signs we have seen to date lead us to believe that the impact of the shock is proving to be faster than we first expected, but not larger,” Poloz said.

The Bank’s task of judging the underlying trend of inflation has been challenging over the past year because of the various shocks experienced by the economy. “Our current best judgment is that the underlying trend of inflation is somewhere around 1.6 per cent to 1.8 per cent,” Poloz said.

While the environment remains uncertain, the BoC’s latest projection shows the Canadian economy returning to full capacity around the end of 2016.