Perspective is everything.
If you woke up Monday thinking the Bank of Canada likely will wait until early next year to raise interest rates, like Jimmy Jean at Desjardins Capital Markets in Montreal, the surprise decline in Canada's gross domestic product in February is a big deal.
A "game changer" that blows up the optimistic case for the Canadian economy, Mr. Jean said in a note to clients that was critical of those who think Canada's economy is growing fast enough to absorb higher interest rates later this year.
But if you woke up Monday thinking the Bank of Canada likely will lift borrowing costs this fall, like Charles St-Arnaud at Nomura Securities in New York, you mostly took the 0.2 per cent GDP drop in stride.
"The weaker momentum reduces the likelihood of the (Bank of Canada) hiking rates early," Mr. St-Arnaud said in a research note. "We continue to believe that it will hike by 25 (basis points) in September."
Get used to this. There is no consensus about when the Bank of Canada will raise interest rates. The needle on the hike-o-meter will move with each piece of significant economy data. Last week, it was titled strongly toward an increase in the Bank of Canada's key rate. Now, the needle has swung back strongly toward neutral, as the February GDP numbers suggest it the central bank's prediction of growth at an annual rate of 2.5 per cent in the first quarter is optimistic. Most analysts say the economy will do well to hit a 2 per cent pace in the first quarter.
One wonders whether a growth rate of 2 per cent would really change the central bank's calculations that much. To be sure, the math argues that policy makers could delay a shift to higher interest rates: a weaker pace of growth implies that it will take longer to close the output gap, the difference between actual economic activity and the maximum output the economy can sustain without stoking inflationary pressures.
But central banks are using the output gap as operational guides these days, not a trigger for action. Last year, Mark Carney, the Bank of Canada governor, indicated he'd be willing to leave interest rates low even after the output gap closed as a cushion against a bad outcome from the European debt crisis. This year, Mr. Carney is flagging household debt accumulation as the biggest domestic risk facing the economy. He may want to nudge the benchmark rate higher to mitigate that risk, regardless of the state of the output gap.
"Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate," Timothy Lane, a deputy governor at the Bank of Canada, reiterated Monday in a speech in Ottawa.
Mr. Carney told Canadian legislators last week that they should readjust their understanding of the world economy to one where the GDP of the United States expands between 2 per cent and 2.5 per cent per year instead of 3 per cent to 3.5 per cent. Expectations for Canada's economy should be similarly adjusted because export income still largely depends on U.S. demand. That's why the Bank of Canada is expecting virtually no gains from trade for the next couple of years.
In February, GDP was hurt by temporary shutdowns in the mining industry and lower profits at utilities because of warmer-than-usual weather. With commodity prices where they are, mining surely will rebound in the months ahead. And a decline at utilities means households have money in the bank as the result of lower energy bills.
The February GDP certainly was weak. But it seems unlikely the report will shift thinking at the central bank to any great degree. That's because policy makers' expectations for Canada's economy already are low.