Mark Carney's outlook has deteriorated for Canada, the United States, Europe, China, the global economy and world prices for key commodity exports like oil. But he is keeping his finger on the trigger for a possible interest-rate hike.
In a quarterly forecast released Wednesday, the Bank of Canada Governor and his policy team expanded on why they have cut Canada's growth projections for 2012 and 2013, and pushed back their time line for when the economy will be back at full capacity. Despite "severe headwinds," they are confident the economy can stay afloat as long as the European crisis is not allowed to spin out of control, U.S. politicians manage to avert the so-called fiscal cliff, and oil prices don't drop to levels that could see investment in resource projects grind to a halt.
That's a lot of ifs, but even as central banks in advanced and developing nations take measures to stimulate flagging economies, Mr. Carney insists that in Canada, the next rate move is still more likely to be an increase than a reduction.
"Global monetary policy is not a 'cut and paste,' " Mr. Carney told reporters Wednesday in Ottawa after releasing his forecast. "There is a very small amount of excess capacity in this economy."
The central bank's forecast and its interest-rate decision on Tuesday included hints that it is not even considering the possibility of rate cuts down the road. For example, even as the housing market cools, policy makers are still uncomfortable with the high debt loads many households are carrying, and lower interest rates would exacerbate that problem.
Still, Wednesday's forecast was littered with signs that while Mr. Carney's bias is tilted toward raising the rates as soon as he can, that could be several months, if not years, away.
The bank now says the economy grew at a 1.8-per-cent pace in the second quarter, not the 2.5-per-cent pace it predicted in April. Projections for both the second half of this year and the first quarter of 2013 were lowered, too.
A major reason, as policy makers said in their Tuesday decision, is that while low borrowing costs will help consumption and business investment drive Canadian growth, the pace of both will be restrained by the effects of lower global commodity prices on Canadian incomes and wealth.
Those prices have fallen sharply while the Canadian dollar has slipped, but not by nearly as much, limiting the benefits of cheaper energy for exporters in central Canada, whose primary markets, the U.S. and Europe, are languishing.
Oil prices are still high compared with historical levels, but have fallen about 15 per cent since April and are "expected to be substantially weaker through 2014," the central bank said, due to "diminished prospects" for demand from fast-growing emerging markets like China and India.
Mr. Carney and his officials lowered their forecast for global growth this year and next, to 3.1 per cent in both instead of their April call of 3.2 per cent in 2012 and 3.4 per cent in 2013.
They also cut their projections for the U.S. economy – suffering from a sluggish labour market and weak demand for U.S. exports – to 1.9 per cent this year, 2.1 per cent in 2013 and 3 per cent in 2014, compared with their April projections of 2.3 per cent this year, 2.5 per cent in 2013 and 3.6 per cent in 2014.
Should lawmakers in Washington fail to revise a brutal mix of tax increases and spending cuts that is currently on the books, U.S. growth could take a hit of 4 percentage points, the bank said. (Such a drop would surely cause a new recession in the U.S., but it is not considered the likeliest scenario.)
In Europe, even if the debt crisis remains contained, the bank said the euro zone will still contract 0.6 per cent this year, and 2013 and 2014 will be worse than policy makers were anticipating in April, with growth of 0.3 per cent next year instead of 0.8 per cent, and 1.3 per cent in 2014 instead of 1.4 per cent.
Slower European growth and anxiety linked to the European crisis will crimp growth in China through 2014, the bank said.