Bank of Canada blames slow U.S. recovery, strong C$ for export lag

October 29, 2013

Oct 29 (Reuters) - Canadian exports of noncommodity goods have failed to recover as expected due to an atypical U.S. recovery and the loss of companies in the recession, with a stronger Canadian dollar adding to the problem, Bank of Canada officials said on Tuesday.

"The biggest reason exports have been weak is that the U.S. economy, our major export market, has had the deepest recession and the slowest recovery since the Great Depression. So that by itself sets a weak track for an export recovery," Tiff Macklem, senior deputy governor at the central bank, said in an appearance before lawmakers alongside Governor Stephen Poloz.

The Bank of Canada held its key overnight rate unchanged at 1.0 percent last week, but surprised markets by signaling its next move could just as well be a rate cut as a hike, effectively ending the mildly hawkish stance it had held for a year and a half.

Macklem said the strength of the Canadian dollar versus the U.S. dollar is only part of the reason for the lagging exports.

"There are competitiveness factors, the (Canadian) dollar is part of that. We estimate it's about two-thirds of that and one-third is the weak productivity performance we've had over the last decade," he said.




The bank has repeatedly expressed disappointment that exports - a central plank of the Canadian economy - have not bounced back as quickly as the bank's models had predicted.

Asked to explain its faulty forecasts, Poloz said the reason is that the U.S. recovery is taking much longer than any recovery from past crises, and he emphasized that many Canadian companies simply vanished in the 2008-09 recession.

Now, he said, that trend is starting to reverse itself.

"The good news is we've seen a sudden increase in the population of companies in 2013, which is very encouraging," Poloz said.

"It's the first evidence that we've seen since 2008 of what I would call natural growth, which is the growth process that is self-generating, self-sustaining, and I do believe that that will bring more balance to the labor market performance as we go through the next couple of years."