Wednesday, November 18, 2015

Monetary policies exhausted, oil continues weakness

Some worrying prospects are accumulating for the Canadian economy. The Canadian economy has now seen two quarters of declining GDP - falling by 0.80% in the first quarter and by another 0.5% in the second quarter of 2015.  This would theoretically be considered recessionary.  The decline lasted for five months, before in June and July the economy started to show signs of moderate growth with GDP rising by 0.4% and 0.3% correspondingly. But what Carol Wilkins, the Bank of Canada's senior deputy governor, had to say last Friday put a chill on the longer term prospects for the Canadian economy.

Carol Wilkins was not very buoyant about the recent growth in Canada and rather said that the types of policies, which Canada’s central bank has been pursuing in the last several years, are not working. In fact, she referred to some European countries which introduced negative interest rates, after arriving at zero rates that had previously been considered a limit for monetary policies. Ms. Wilkins put it softly, as her position entails, that this new policy is likely to fail too: “It’s too early to tell how effective negative rates are at creating additional demand.” And instead advised the Europeans to play with exchange rates.

At the same time, Canada has been doing effectively the same thing as many European countries - the Bank of Canada slashed its key rate twice this year to 0.5% currently, with little result. The exchange rate play is also not bringing much of a result. The Canadian dollar has dropped from 86 US cents to 75 US over the course of the year and it has not yet brought much boost from exporting industries to the overall economy. The key problem, the slump in energy prices and commodity prices generally, outweighs everything else. As commodity prices continue to languish, both the Bank of Canada and the new government will have to be more creative to provide a boost to Canada's struggling economy.

Ukrainian Credit Union Limited

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