Stephen Poloz: Canada's economy moving toward 'natural growth'

The Canadian economy is on its way to growth fueled by business investment and healthier global demand, Bank of Canada Governor Stephen Poloz said today in a speech in Vancouver.

“I anticipate that the Canadian economy will normalize and growth will become natural, in contrast to the economic activity of the past six years, which has been fuelled by policy, including record-low interest rates,” the governor told members of the Vancouver Board of Trade. “Natural growth will be self-generating and self-sustaining, and the economy will be growing at its potential, as its productive capacity expands.”

Record-low interest rates since the onset of the financial crisis have propelled consumer borrowing and residential housing demand in Canada, swelling household debt to record levels and pushing house prices to levels that economists say are not in line with income growth.

The Canadian economy, though, is about to turn from consumer-driven to investment and export-driven growth, Poloz said on Wednesday, speaking shortly before the U.S. Federal Reserve is expected to announce it will start tapering its massive bond-buying program known as QE3. Anticipation about a coming reduction in the size of the Fed’s asset purchases has pushed up long-term interest rates across the world, including Canada.

A Fed decision to taper would also be a vote of confidence in the strength of the U.S. recovery. “Evidence suggests we are now close to the tipping point from improving confidence into expanding capacity,” Poloz said. Stronger investment would speed up the pace of job creation and improve Canada’s labour productivity, as firms buy new tools for workers.

“As global demand improves and investment growth strengthens, we should see higher potential output growth – that is, an increase in the speed at which the Canadian economy can grow without causing inflationary pressures,” the governor said, “The message here is that the economy should be able to support stronger activity without stoking inflation as investment ticks upward. Such an endogenous response of potential to stronger demand would be natural, given the slack that we see in our labour market.”

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