The Bank of Canada was already caught behind the times – or perhaps, in its thinking, between the times – once this year. It may be happening again.
In the central bank's regularly scheduled interest-rate statement released Wednesday morning (something it does eight times a year), it acknowledged, remarkably briefly, that the Canadian economy enjoyed "strong growth" in the second quarter.
In fact (a fact the bank pointedly didn't bring up), Statistics Canada reported last week that gross domestic product grew at an annualized rate of 3.1 per cent in the quarter ended June 30 – well above the bank's estimate of 2.5 per cent contained in its July monetary policy report (MPR), the vehicle it uses to update its economic forecasts four times a year.
But never mind. The central bank noted that because of a weaker-than-expected first quarter (Statistics Canada last week revised down the quarter's growth rate to 0.9 per cent annualized, from an originally reported 1.2 per cent), total GDP was at "almost exactly the level the bank had anticipated in July's MPR." The implication is that the hot second quarter merely made up for the weak first quarter, and so economic growth is shaping up as Bank of Canada Governor Stephen Poloz and his colleagues expected.
But it's not. The level of GDP may be where the Bank of Canada anticipated, but the speed most certainly isn't. The economy was growing much faster in the second quarter than the Bank of Canada anticipated. So was the U.S. economy, which grew at a 4.2-per-cent annualized pace in the second quarter, and has shown few signs of slowing since.
It could well be that the second quarter was just a bounce-back from the first, was bloated by pent-up demand from an unusually harsh winter, and thus was a one-off growth surge whose momentum won't be carried over to the second half of the year. This may well be the Bank of Canada's belief. But in its brief interest-rate statement, it didn't elaborate on its growth outlook. For that, we'll have to wait for its next update of its economic forecasts, in the mid-October MPR. Only then will we know if the central bank has seen fit to adjust its growth expectations in light of the second-quarter surge in economic momentum in North America.
This isn't the first time this year that the Bank of Canada has been caught in between MPRs when key economic data made its economic forecasts look stale, to say the least. In early June, the bank issues an interest-rate statement in which it continued to express concern about "downside risks" to inflation, even though total consumer price index inflation had surged above 2 per cent over the spring – nearly two years before the bank had projected reaching that key level.
When it issued its MPR in July (at which time it also backed away from its previous disinflation fears), it substantially revised its quarterly inflation forecasts – while acknowledging that it knew its April projections had been overtaken by reality, but had to wait for the next MPR to formally update them.
Now it finds itself with GDP growth numbers possibly overtaking its forecasts, yet still six weeks away from the scheduled release of updated projections in another MPR. Once again, the economic data beg for a revisiting of the Bank of Canada's forecasts. And once again, the bank is treading water until its next MPR. There's no reason to think the bank hasn't noticed the growth surge and isn't gauging its implications; but its communications schedule dictates that it not fill us in on that until October.
Perhaps it's time the central bank seriously consider more frequent updates to key economic projections such as inflation and GDP growth. In a rapidly evolving economy, quarterly updates are starting to look distinctly inadequate. Updates accompanying the eight-times-a-year rate statements would certainly be more timely, and would save the central bank from having to explain and defend its thinking after the fact – as it had to on inflation, and as it may soon have to on GDP growth.