Bank of Canada Governor Stephen Poloz has been highlighting the dangers of protectionism, and the country will probably get a taste this week as the U.S. is expected to issue preliminary countervailing duties on softwood lumber. Bank of Montreal said in a report last week it expects duties in the range of 20 percent to 30 percent, with additional anti-dumping duties coming later in the year. And in a round-table interview with reporters Sunday, Poloz said the measures will probably have some impact on the nation’s economy. “It is an important business for Canada, it’s got a lot of employment in it and it’s geographically diverse,” said Poloz, who was speaking in Washington where he was attending meetings of the International Monetary Fund. “It matters.” The Bank of Canada has already added a “modest amount of negative judgment” into its forecasts, using a historical analysis of how countervailing duties affected lumber exports in the past, Poloz said. Canada exported almost C$16 billion ($11.9 billion) worth of lumber in the year through February, levels not seen since 2006, as Canadian producers took advantage of unfettered access to the U.S. market after the last softwood lumber pact between the two countries expired in October 2015. The run-up in lumber sales gave a significant boost to Canada’s struggling export sector last year—providing about one quarter of the increase in the country’s non-energy exports. When the U.S. last imposed countervailing and anti-dumping duties on Canadian lumber in 2001, exports fell by about 12 percent over two years. Poloz Comments In the interview in Washington, Poloz touched on a number of issues—from Ontario’s housing measures to geopolitical risk. Here are the highlights:
  • Poloz said he’s happy Ontario took steps to slow Toronto’s housing market and expects they will make a “contribution.” He reiterated that he doesn’t think interest rates are the right tool for managing such a risk.
  • The Toronto housing market would probably have slowed regardless of any measures, since the price escalation would inevitably sap demand.
  • On business investment, he said while companies seem to be more prepared to spend, there’s no sign of the “expansionary investment” the bank is looking for. That sort of investment “as a macro phenomenon, it’s not really there.”
  • At a time when global economic data seems to be stronger than policy makers had been expecting, Poloz conceded the long period of serial disappointment could be producing more cautious economic forecasts.
Toronto Housing The big story last week was the Ontario government’s measures—16 in total—to rein in Toronto’s soaring housing prices, centered around a 15 percent tax on foreign home buyers. The steps were widely applauded by economists and policy makers, including Finance Minister Bill Morneau and Poloz. But will the measures be enough, or are they too late? That all depends on how effective the moves are at scaring away investors. Or as Morneau told reporters on April 21: “We do believe there is an important issue around psychology in the market that needs to be addressed.” Problem is, market psychology can’t be measured. “That’s kind of a psychological thing, so it’s pretty hard to predict how those measures will affect the way people think,” Poloz said last week. “It’s one thing for me to say that doesn’t look sustainable.” Week Ahead
  • Wholesale sales (Monday, 8:30 a.m.)
  • Bloomberg Nanos Consumer Confidence Index (Monday, 10 a.m.)
  • Retail sales (Wednesday, 8:30 am)
  • CFIB Business Barometer (Thursday, 7 a.m.)
  • GDP, industrial product prices, raw material prices (Friday, 8:30 a.m.)
Blame Game Are the housing measures too late? An analysis by Ted Carmichael, a former managing director at the Ontario Municipal Employees Retirement System, shows there have been two major booms for Toronto housing before the current rally: one in the mid-1970s that came with a slowdown in actual prices but no collapse (real prices did fall however), and a much more pronounced one in the late 1980s that came with a crash. Carmichael concludes the current boom probably fits somewhere in between the previous two. If Toronto’s housing market does take a sharp tumble, there may be plenty of finger pointing:
  • Did Ontario Premier Kathleen Wynne’s Liberals wait too long to act, after the federal government moved last year?
  • Could Morneau’s measures have been more aggressive—as Ontario had wanted—and did he do a good enough job coordinating with the provinces. Many blame British Columbia’s tax on foreign buyers for driving capital flows to Toronto.
  • How much blame should go to former Prime Minister Stephen Harper, whose government chose to ignore recommendations from his finance department in 2015 for more measures? Harper’s reluctance to use fiscal policy to offset the slowdown also put pressure on the central bank to cut interest rates, fueling demand.
  • Should Poloz have been more concerned about the impact monetary policy was having on the housing market, even if it meant slower economic growth. The previous government’s major criticism of Poloz’s predecessor, Mark Carney, was that he was too preoccupied with financial stability issues.
The first indications of any impact should start coming next week, when the Toronto Real Estate Board is due to report sales and price data for April.